Pigovian Tacks

Conventional estimates put the appropriate level for a carbon tax (to combat global warming) at the equivalent of between 10 cents and one dollar per galoon of gasoline. I've been driving on the highway in Connecticut today, and judging by the mix and behavior of vehicles after several years of rapidly rising gasoline prices, my intestinal econometrics tells me that $1 would not be anywhere near enough to have a significant impact: a dollar a gallon is basically saying we don't care much about global warming, or at least that we don't intend to address it primarily by reducing use of carbon-based fuels.

My modest (really!) proposal: a carbon tax equivalent to about $5 per gallon, to be phased in over, say, 10 years, with the first few increments to be fully rebated as lump sum transfers and later increments to be partially rebated and partially applied to. Medicare or other federal health care programs, with some provision for flexibility based on economic and budgetary conditions. Along with huge punitive tariffs on goods with Chinese content until the Chinese adopt similar policies.

Since most people seem to think even 10 cents per gallon is too much, my money would be on global warming. Unfortunately, because uncertainty is a big part of the problem, it's hard to know how to play it. If Case and Shiller come up with a futures contract for beachfront properties, though, it sounds like a good long-term short. But the contract would have to specify what happens when some fraction of the index ends up underwater (literally).



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