Friday, April 9, 2010

Should we replace our sales tax with a carbon tax?

The Stand Up Economist delivered some funny jokes in Nashville this week but also proposed replacing our sales tax with a carbon tax.  He argued that it is more efficient to tax consumption of goods with bigger external costs (there is pollution, traffic, and sprawl, even if you don't think carbon is causing climate change) rather than goods with smaller external costs (sales, business income).

Each year, Tennessee consumes about 142 million tons of carbon so a $30/ton tax would raise more than $3 billion (assuming a 20% reduction in carbon consumption).  This would allow us to cut our state sales tax in half, or eliminate our state business tax entirely.  $30/ton of carbon is about $0.30/gallon of gasoline.

I think i am down with this, but haven't heard the other side.


  1. The other side is you will ultimately have BOTH taxes at high levels. If you could eliminate the sales tax in its entirety (so it cannot be easily revived), then it would certainly be worth considering.

    Having both types of taxes will only lead to more govt, more spending, and ever more and increasing tax rates.

  2. The primary problem with a carbon tax (or any other form of Pigovian tax) is that proponents are consistently tone-deaf in calling it a tax, which is guaranteed to cause the public to flinch and hate it on general principles.

    It's better to call it a usage fee (or similar), because that's ultimately what it is. You pay the fee, you have the right to pollute X tons of carbon. It ties the cost directly to the benefit and avoids the "T" word.

  3. A few corrections/comments:

    1) $30/ton of CO2 would raise about $3 billion, not $300 billion. More details here:

    2) I tripped up during my talk when I said 125 million tons of CO2 emission in TN; that's metric tons, and Americans are more familiar with short tons, in which case it's 141 million short tons of CO2. See the link above for details.

    3) Thanks for noting that $30/ton CO2 is $0.30 per gallon of gasoline. It's easy to confuse a tax per ton of CO2 with a tax per ton of C, and there's a roughly 4-fold difference between them because of... science. (A ton of C turns into 44/12 = 3.66 tons of CO2, so a tax of $30 per ton C turns into a tax of $8.20 per ton CO2.) A gas-tax equivalent is the best way to be clear, and I like to use $/ton CO2 because there are handy rules of thumb: $30/ton CO2 is about $0.30 per gallon of gasoline and about $0.03 per kWh of coal-fired power.

  4. Is the tax only on the end consumer? If it is on the producer I'd move my power plant to Kentucky or Alabama and sell into the TN grid. Not sure on the CO2 math either. Tennessee Valley Authority uses a lot of chemical lime to scrub its stacks. This is in addition to the coal it burns. A $30 / ton tax on CO2 would equate to a $1.8 billion tax on the lime industry. (Industry Revenues in 2009 were $1.5 billion for 20 million tons. 1 ton of lime produced yields about 3 tons of CO2 [Heat (burn gas or coal) + CACO3 (limestone) = CAO (lime) + CO2].

    What about tax credits for carbon reabsorption?

  5. 1. What is the supply elasticity of CO2 produced energy?

    2. What are the positive externalities from reducing atmospheric CO2. I recently read an article about faster plant growth (in soils that aren't nitrogen poor) due to higher atmospheric CO2, so I am not convinced that net externalities to CO2 production are negative.

    Although the spin on this journal article is against CO2, it does state what I said:
    There have been quite a few others too.

    Since nitrates aren't in short supply in commercial farming (due to chemical fertilization) its likely that there would be higher crop yields. Even 5% higher yields due crop growth from higher co2 would probably (doing a back of the envelope calculation) more than outweigh all the negative externalities from the increased CO2 during the human era.

    This would be a really interesting thing for an economist too look at actually, put you should probably have tenure before you do it.

  6. Er, by "human era" I meant, "since the industrial revolution." I misswrote.