Carbon Tax and Carbon Untax

Why the untax works—A thought experiment
We wouldn’t want to try it, but it shows why the untax works. For simplicity ignore all energy except gasoline. Suppose the untax rate was so high that the price of gasoline went up from $3 to $53 per gallon. Suppose everyone in the country has the same driving habits. Everyone pays the same untax charge—$50 per gallon—and gets the same untax refund. So everyone’s refund equals their tax payment. What would people do?

As a first guess, let’s say everyone would keep driving the same and using 500 gallons per year. Now $50 of the $53 cost of gasoline is the untax charge, so everyone pays $25,000 per year of carbon charges and gets back $25,000 per year as an untax refund. Everyone could use the refund to pay the tax and make no change in fossil fuel use. But would they?

Unlikely. Some might not change at first, but most people would figure some way to use less gasoline. For example, they might carpool to work or buy a hybrid car and save $10,000 per year in carbon charges. Suppose only half the consumers do this in the first year. What happens? Untax revenues decline, so untax refunds decline but by only $5,000 per person per year on average. So refunds are now $20,000 per person. The half who didn’t conserve are still paying $25,000 in carbon charges, and the half who did are paying $15,000. So the winners, come out ahead by $5,000 per year, and losers come out $5,000 in the hole. Conservation pays off. That’s why the untax works.

The losers see this and catch on. Next year everyone carpools or buys hybrids and saves $10,000 so refunds go down to $15,000. They are now all conserving. Anyone who quits conserving will again pay $25,000 for gasoline, but with everyone else conserving they will get back only the average—$15,000. The incentive to conserve is just as strong as ever. This is why the untax keeps working.

http://zfacts.com/p/933.html | 01/18/12 07:26 GMT
Modified: Mon, 31 Mar 2008 05:21:28 GMT