Carbon and Inequality

For the last few weeks, Congress has been debating the Lieberman-Warner Climate Security Act. I haven’t written about this, as I think Jim Manzi has already made the case against cap-and-trade pretty effectively, but I’d just like to emphasize one minor point. Environmentalists fret that the Lieberman-Warner measure doesn’t go far enough, but they it as a dry run for future environmental legislation. It’s worth thinking through the impact such legislation will have on American families.

Christian Broda and John Romalis, economists at the University of Chicago’s Graduate School of Business, have just released a fascinating working paper on consumption in America. They argue that America’s poor are the overwhelming beneficiaries of freer trade — because a higher share of their income is spent on non-durable goods as opposed to services, the proliferation of Chinese-made non-durable goods has been a tremendous boon. It has made money earned by the poor go further. More affluent Americans, in contrast, are more likely to purchase in-person services, the prices of which have been steadily increasing. And so the money earned by the rich is, counterintuitively, going less far. Once you factor in the carbon impact of shipping manufactured goods U.S., you see that the lifestyle of the rich really is in some sense greener. Massage therapy emits very little carbon into the atmosphere. So pricing carbon will have a disproportionate impact on the poor. But wait, wait about abatements for lower income Americans? I urge you to check out Monica Prasad’s excellent op-ed on carbon taxes that work vs. carbon taxes that fail.

Carbon tax discussions always seem to devolve into gleeful suggestions for ways to spend the revenue. Reduce the income tax? Give the money to low-income consumers? Use it to pay for health care? Everyone seems to forget that the amount of revenue is directly tied to the amount of pollution that is still going on.

Denmark avoids the temptation to maximize the tax revenue by giving the proceeds back to industry, earmarking much of it to subsidize environmental innovation.

So yes, we could use carbon tax revenue to soften the impact on less affluent Americans. But this will undermine the measure’s environmental impact.

What we need is a $100 billion prize or set of prizes to the person or firm or non-profit entity that can devise a cost-effective means of scrubbing the atmosphere of carbon emissions. This sounds insane, I realize. It is less insane than the far costlier, far less egalitarian regulatory alternative.