Burning fossil fuels creates so-called “external costs” because it contributes to ongoing climate change. This is a fancy way of saying that when I burn such fuels, other people become worse off than they would be otherwise, because I have increased the odds that they will suffer damages from anthropogenic global warming (AGW). This both seems unfair, and means that we will burn more fossil fuels than would seem to be socially optimal. It seems obvious to many people that we should therefore tax fossil fuels in order to prevent this. This is termed a Pigovian tax, and is sometimes referred to as “internalizing the externality”, or taxing fossil fuels to reflect the “social cost of carbon”.
It’s not so obvious to me that this is good idea. To implement it would be little more than a re-labeling of the kind of comprehensive planning that Hayek attacked sixty years ago.
Over at the Daily Dish I try to explain why.