Rev up the Carbon Taxes

by Frank de Jong

Carbon levies are fraught with variables, a whack-a-mole game of cascading effects. But interestingly, I think they will reduce both housing costs and C02 emissions.

If fossil energy was purely a house-like asset, i.e., the price reflecting the cost of production, a carbon fee would behave like a Pigouvian tax, reducing emissions directly proportional to the size of the fee.

But fossil energy is also a land-like asset, i.e., the price is determined by what the market will bear. Therefore CO2 reductions will not respond like a tax on cigarettes. Fossil energy producers may simply choose to absorb the tax, forgoing some of the super profits they normally pocket, leaving the price, and thus the amount of energy used, unchanged.

To further complicate things, if energy costs rise but people decide fossil fuel use is inelastic, some of the rent capitalized into the price of land (which reflects available disposable income) will have to be diverted to fuel costs, thus reducing land values, and again, leaving emissions unchanged.

To recap, fossil energy has a cost of production AND it attracts rent, it’s both house-like and land-like. But since fossil fuel use is obviously only somewhat elastic, the effect of carbon fees will be distributed between reducing C02 emissions and lowering the purchase price of land.

By definition, economic rent sharing is not punitive to any industry or lifestyle. It doesn’t encourage nor discourage any enterprise because it always leaves an operating profit in place. Picking winners and losers is the job of Pigouvian taxes, not Geonomics.

Economic rent capture is not political or environmental, it’s just sound economics that forces the speculative economy to shift to the productive economy.

To reduce activities like smoking, drinking or fossil fuel use, politicians instinctively think Pigouvian taxes, not rent capture. Sin taxes make substances like cigarettes and booze more expensive because these substances are endlessly replicable and thus don’t attract economic rent. Fossil fuels, on the other hand, are monopoly-held, finite gifts of nature which usually command prices above the cost of production.

But never mind that most politicians and consumers won’t understand that eco-sin taxes won’t reduce fossil fuel use until all the economic rent has been stripped off by LVT. It’s not important to understand the difference between rental value sharing and sin taxes, nor does it matter if carbon fees also reduce land values, the effects of both are positive for the economy, nature and society.

Furthermore, whether carbon levies work or not, they are still highly beneficial since they offset economy-damaging, dead-weight taxes on jobs, business and sales.

And regardless of how effectively carbon levies reduce emissions or lower land values, they clearly remove some of the super profits from the fossil energy industry, giving renewables and conservation closer to the level playing field they deserve. (Remember that renewables and conservation don’t attract rent and thus can’t generate profits above the cost of production, which means they don’t attract equivalent investments.)

So, drive your Chevy to the carbon levy, everybody wins.