This is the printable version of an article from Infernal Ramblings (infernalramblings.com). The original web-optimised article is also available.

Just Impose A Carbon Tax

Trying to quantify the costs and benefits of goods with positive externalities is a thankless and ultimately impossibly difficult task. Why not straightforwardly assess a tax on the source of our energy woes, carbon-based fuel?

Written by johnleemk on 2:17:21 pm Aug 29, 2007.

Recently, I read an interesting news story about the potential of some strange plant which could apparently serve as the fuel of the future.

The plant is incredibly promising — it does not need much water, can survive in land where nothing else grows, and since it is non-edible, it will not compete in any direct way with the goal of feeding the hungry (as opposed to corn and sugar cane).

Naturally, people have been clamouring for governments to subsidise this plant's production because of its good for society.

In economic jargon, this would be called internalising a positive externality — accounting for the benefits to society of a good whose benefits are not presently accounted for in its price.

But a number of objections have sprung up. For one, the crop's yield of fuel differs based on variables such as fertility, water supply, etc., so subsidising the crop's growth is problematic.

In addition, the substantial tracts of land which would be required for growing these crops poses a real problem. Ultimately, when you perform the cost-benefit analysis, is this the solution, or even a solution to the energy problem?

The problems with this odd miracle plant are mirrored in almost every other proposed solution to the issue of energy. Every potential answer has its lobbyists clamouring for government subsidies.

The problem with this idea that we ought to subsidise green products is pretty obvious — it distorts the market, because we pick and choose what is green and what is not.

Ultimately, the individual knows what is best for themselves. The appropriate action to take for a negative externality is to account for its societal costs in the price charged to the individual, by levying a tax on the product causing the negative externality.

In the case of energy, this would be a carbon tax levied on petroleum. It would now be up to individual agents in the economy to decide what solution is best for them.

Consumers would decide whether they should just drive less and take more public transport, whether they should start working on their computers with the room lighting off, and so forth.

Meanwhile, producers would decide whether to invest in previously too expensive sources of petroleum, to invest in more energy-efficient gadgets, or whether, yes, to grow miracle energy crops.

We must treat economic externalities appropriately. Incentives and disincentives must be applied in accordance with the type of externality.