Jim Manzi makes the case for higher petrol taxes
JIM MANZI does not think that it's a good idea to use Pigovian taxes to reduce emissions or, it seems, to cut oil consumption. I've always found his arguments interesting but wholly unpersuasive. Here's a small dose, in reaction to a Kevin Drum on the relatively small estimated elasticities of demand for oil produced in a recent IMF study:On one hand, you don’t need a lot of fancy econometrics to reach the basic conclusion that we could double the price of oil, and we’d still be carefully examining succession issues in Saudi Arabia. For example, it’s simple to observe that even really large, sustained price swings haven’t prevented amazingly steady growth in U.S. gasoline usage for more than half a century. Yes, people react to prices, but it’s hard to imagine that we could today impose a price high enough to get out of the structural problems of global warming (to the extent that you accept that) or our dependence on unstable regimes for oil.And on the other hand, price elasticity in the future cannot be divined by such models. As the available trade-offs change, the price elasticity of oil will change. Specifically, to the extent that we continue to progress in making non-fossil-fuels technology cheaper and more effective for an ever wider array of applications, we can accelerate the ongoing de-carbonization of our economy. The idea of economists to use artificial scarcity pricing to do this is aggressively marketed in blogs, magazines and TV shows, but is extremely unlikely to work, because the current price elasticity of oil is so low. The work of engineers and physical scientists, however, is likely to be determinative. Ok, so, a few points. First, the lesson of the last half century's worth of consumption is clearly that when prices go up consumption per person falls and when prices go down consumption per person rises. America's total petroleum consumption is about the same now as it was in 1998—just under 19 million barrels per day—despite the fact that the country has added over 30 million people during that period and vehicle-miles traveled have increased by about 30%. Now, oil prices have increased a lot over that 10-year span, but fuel prices in America are still less than half of the European average—not, in other words, at some humanly intolerable level. As Mr Drum points out, long-term elasticities are greater than short-term elasticites. In just the few short years in which Americans have had an opportunity to react to high prices, they've adjusted as best they could: by cutting down on extraneous trips, or swapping an old clunker for a newer, more efficient vehicle. If prices rose over a longer time horizon—absent the sharp reversals in prices the world oil market saw in the 1990s, and as one would design a policy aimed at cutting long-term consumption—then more substantial substitutions would occur. Both firms and households would reconsider their location choices, markets would focus on producing ever better high-efficiency vehicles, and more costly alternative technologies would be priced into the market.This touches on Mr Manzi's second point; if you think the key to reducing consumption is alternative technologies, then higher prices are a good way to encourage their development. What's more, in the event that demand for the undesirable good is highly inelastic, a Pigovian tax on that good will raise a lot of revenue which can in turn fund a great deal of research into the development of alternatives—or of anything else you'd like to spend money on.This is what I ultimately don't understand about Mr Manzi's argument. If demand for carbon or oil is relatively elastic, then a tax on carbon or oil is a great way to reduce dependence on carbon or oil. If demand for carbon or oil is relatively inelastic, then a tax on carbon or oil is a great way to generate revenue. After all, a tax on those negative externalities will reduce their output a little bit, and given the choice between reducing carbon a little bit and reducing income a little bit, wouldn't we prefer to reduce carbon? Even if you think humanity should do absolutely nothing to stop global warming or reduce oil dependency, governments will want to spend money to handle the inevitable costs of warming or oil-dependence, and it would be far better to fund that spending with as efficient a tax system as possible. And there's no question that a system more dependent on taxes on negative externalities is more efficient than one more dependent on taxes on income.