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Saved by Taxes

What do we owe to our great-great-great-grandchildren? What actions are we obligated to take now in order to diminish the risks to our descendants and our planet from the increasing likelihood of global warming and climate change?

Almost everyone – except the likes of ExxonMobil, US Vice President Dick Cheney, and their paid servants and deluded acolytes – understands that when humans burn hydrocarbons, carbon dioxide goes into the atmosphere, where it acts like a giant blanket, absorbing infrared radiation coming up from below and warming the earth.

Likewise, almost everyone understands that while global warming might be a much smaller or larger problem than existing models suggest, this uncertainty is no excuse for inaction. In fact, uncertainty about global climate change should lead us to do more to guard against it than if we knew it would proceed exactly according to the central-case projections.

Finally, almost everyone agrees that governments, non-profit institutions, and energy companies should be spending far more to develop technologies that generate non-carbon-emitting power, that remove it from the atmosphere to forests or oceans, and that cool the earth by reflecting more of the sunlight that lands on it.

Clearly, the world’s rich countries should carry the burden of dealing with climate change over the next generations. After all, they could take an easy, emissions-intensive path to industrialization and wealth. Today, China, India, and other developing countries cannot, and it would be unfair to penalize them for that.

So now is the time to build, not disrupt or impede, the international institutions that will manage our response to global climate change in the years ahead. But should we be doing anything else now and in the next decade?

Economists like to think of things in terms of prices. And when economists see behavior that has destructive side effects, we like to tax it. Taxation makes individuals feel in their wallets the destruction they are causing. Imposing a tax on those who, say, drive low-mileage SUV’s is a way of harnessing humanity’s collective intelligence to decide when bad side effects are a reason to alter behavior.

But it has to be the right tax. An SUV going ten miles in the city and burning a gallon of gasoline pumps about three kilograms of carbon into the atmosphere. Should the extra “global warming” tax be $0.05 a gallon, $0.50 a gallon, or $1.50 a gallon? Our views will change as we learn more, but at the moment the size of the tax hinges on a question of moral philosophy: how much do we believe we owe our distant descendents?

The Australian economist John Quiggin has an illuminating discussion on his website ( http://johnquiggin.com ) that comes down on the side of a $0.50/gallon tax, because he projects that spending today to reduce carbon emissions is a good investment for the future. Assuming that annual per capita income grows at about 2% per year worldwide, a marginal expenditure of roughly $70 today to cut carbon emissions would be worth it if, accounting for damage from global warming and adjustment costs, the world of 2100 would be $500 richer in year-2006 purchasing power.

On the other hand, critics point out that the world today is poor: average annual GDP per capita at purchasing power parity is roughly $7,000. We expect improved technology and its spread to make the world of 2100, at a 2% annual growth rate, much richer: $50,000 per capita of year-2006 purchasing power. So the critics argue that we need the marginal $70 per capita today much more than the richer people of 2100 will need the $500 that they would gain from being spared the effects of global climate change.

But what the critics often don’t say is that the same logic applies to the world today. Average annual per capita incomes in the US, Japan, and Western Europe are currently around $40,000, and less than $6,000 for the poorer half of the world’s population. The same logic that says we need our $70 more than the people of 2100 need an extra $500 dictates that we should tax the world’s rich more, as long as each extra $500 in first-world taxes generates as little as an extra $70 in poor countries per capita incomes.

In short, if the world’s rich are stingy today toward our much richer descendants, and if we want to leave our environmental mess to them to deal with, we should be lavish toward the world’s poor. Likewise, if we are stingy today toward the world’s poor, we should be lavish toward our descendents.

At least, that is what we should do, if our actions are based on some moral principle, rather than that of Leonid Brezhnev: what we have, we hold.