45 US Economists Call For Ever-Rising Taxes On Carbon Fuel — What Modi Has Been Doing Since 2014

Some 45 top economists from across the US political spectrum, including several former chairpersons of the US Fed (Janet Yellen, Ben Bernanke, Alan Greenspan and Paul Volcker) and Nobel laureates in economics (including George Akerlof, Daniel Kahneman, Richard Thaler and Robert Shiller) have called for the imposition of a carbon tax in order to tackle climate change without relying too much on tougher regulations.

The group has not only called for imposing such a tax on carbon-fuels, but for raising the taxes “every year until emissions reductions goals are met and be revenue neutral to avoid debates over the size of government.” This contrasts with the official US stand under Donald Trump, which is largely into denying the problem of climate change. In 2017, Trump pulled the US out of the Paris climate agreement, but it has survived because the rest of the world didn’t follow suit.

It is interesting that the National Democratic Alliance government under Narendra Modi has been doing precisely what the US economists have been demanding, raising petro-taxes consistently as global oil prices started falling from 2014, but it has been roundly condemned for profiting fiscally from the price fall. About the only valid criticism one can make is that over-dependence on oil taxes for fuelling government spending is a dicey idea. From every other angle, including reducing emissions, it is a good one.

Maybe P Chidambaram, who wanted petrol taxes to be cut by Rs 25 a litre, and Rahul Gandhi, who has been raising a fuss about including petro-goods under GST, should read the US economists’ statement on carbon taxes to be better informed.

The statement, which calls on other economists to sign the petition, was published in The Washington Post. The effort to raise carbon taxes is being coordinated by a Climate Leadership Council, whose founding members include heavyweight economists such as Ben Bernanke, Martin Feldstein, N Gregory Mankiw, George Shultz, and Lawrence Summers.

The statement makes its intent clear: it wants good economics to help tackle the challenge of climate change and not bad regulation.

The first few paragraphs in the statement make its intentions clear:

“Global climate change is a serious problem calling for immediate national action. Guided by sound economic principles, we are united in the following policy recommendations.

“1) A carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary. By correcting a well-known market failure, a carbon tax will send a powerful price signal that harnesses the invisible hand of the marketplace to steer economic actors towards a low-carbon future.

2) A carbon tax should increase every year until emissions reductions goals are met and be revenue neutral to avoid debates over the size of government. A consistently rising carbon price will encourage technological innovation and large-scale infrastructure development. It will also accelerate the diffusion of carbon-efficient goods and services.

3) A sufficiently robust and gradually rising carbon tax will replace the need for various carbon regulations that are less efficient. Substituting a price signal for cumbersome regulations will promote economic growth and provide the regulatory certainty companies need for long-term investment in clean-energy alternatives.”

In an article in 2017, this author had backed the NDA policy of raising petro-taxes for some of these same reasons.

The Modi government, which lost its nerve and cut taxes last October due to political heckling by the opposition, should stick to the path it has chosen since 2014. Higher petro-taxes are good not only for the fisc, but the entire renewable energy sector and for tackling climate change.