Pigovian Taxes and Carbon Emissions

Elizabeth Kolbert, writing in the New Yorker, makes the case for taxes on carbon emissions. Along the way, she explained a fascinating concept of taxation, Pigovian taxes:

 

It’s been almost a century since the British economist Arthur Pigou floated the idea that turned his name into an adjective. In “The Economics of Welfare,” published in 1920, Pigou pointed out that private investments often impose costs on other people. Consider this example: A man walks into a bar. He orders several rounds, downs them, and staggers out. The man has got plastered, the bar owner has got the man’s money, and the public will get stuck with the tab for the cops who have to fish the man out of the gutter. In Pigou’s honor, taxes that attempt to correct for this are known as Pigovian, or, if you prefer, Pigouvian (the spelling remains wobbly). Alcohol taxes are Pigovian; so are taxes on cigarettes. The idea is to incorporate into the cost of what might seem a purely personal choice the expenses it foists on the rest of society.

One way to think about global warming is as a vast, planet-wide Pigovian problem. In this case, the man pulls up to a gas pump. He sticks his BP or Sunoco card into the slot, fills up, and drives off. He’s got a full tank; the gas station and the oil company share in the profits. Meanwhile, the carbon that spills out of his tailpipe lingers in the atmosphere, trapping heat and contributing to higher sea levels. As the oceans rise, coastal roads erode, beachfront homes wash away, and, finally, major cities flood. Once again, it’s the public at large that gets left with the bill. The logical, which is to say the fair, way to address this situation would be to make the driver absorb the cost for his slice of the damage. This could be achieved by a new Pigovian tax, on carbon.