by Calculated Risk on 7/11/2006 04:16:00 PM

Dr. Stiglitz proposes in the Economists’ Voice: A New Agenda for Global Warming. Dr. Stiglitz proposes a global environmental tax:

There is a second problem with Kyoto: how to bring the developing countries within the fold. The Kyoto protocol is based on national emission reductions relative to each nation’s level in 1990. The developing countries ask, why should the developed countries be allowed to pollute more now simply because they polluted more in the past? In fact, because the developed countries have already contributed so much, they should be forced to reduce more. The world seems at an impasse: the United States refuses to go along unless developing countries are brought into the fold; and the developing countries see no reason why they should not be allowed to pollute as much per capita as the United States or Europe. Indeed, given their poverty and the costs associated with reducing emissions, one might give them even more leeway. But, given their low levels of income, that would imply that no restraints would be imposed on them for decades.

There is a way out, and that is through a common (global) environmental tax on emissions. There is a social cost to emissions, and the common environmental tax would simply make everyone pay the social cost. This is in accord with the most basic of economic principles, that individuals and firms should pay their full (marginal) costs. The world would, of course, have to agree on assessing the magnitude of the social cost of emissions; the tax could, for instance, be set so that the level of (global) reductions is the same as that set by the Kyoto targets.

As technologies evolve, and the nature of the threat of global warming becomes clearer, the tax rate could adjust, perhaps up, perhaps down. ... each country could keep its own revenues and use them to replace taxes on capital and labor: it makes much more sense to tax "bads" (pollution,like greenhouse gas emissions) than to tax "goods," like work and saving. (Economists refer to these taxes as corrective taxes.) Hence, overall economic efficiency would be increased by this proposal. The big advantage of taxation over the Kyoto approach is that it avoids most of the distributional debate. Under Kyoto, getting the right to pollute more is, in effect, receiving an enormous gift. (Now that pollution rights are tradeable, we can even put a market value on them.) The United States might claim that because it is a larger country, it “needs” more pollution rights. Norway might claim that because it uses hydroelectric power, the scope for reducing emissions is lower. France might claim that because it has already made the effort to go into nuclear energy, it should not be forced to reduce more. Under the common tax approach, these debates are sidestepped. All that is asked is that everyone pay the social cost of their emissions, and that the tax be set high enough that the reductions in emissions is large enough to meet the required targets. The economic cost to each country is small—in some cases, actually negative.

Now that the scientific debate concerning Global Warming is over (it is over except for the industry shills), it is now time to consider policies to reduce pollutants. This proposal seems like an excellent alternative to Kyoto.