Holy Grail. Are Green Taxes the Answer to Pollution?

• Author: G. Tracy Mehan III
• Position: Executive director for government affairs with the American Water Works Association and an adjunct professor at Scalia Law School, George Mason University
• Pages: 6-7

6 | THE ENVIRONMENTAL FORUM Reprinted by permission from The Environmental Forum®, January/February 2022.

Copyright © 2022, Environmental Law Institute®, Washington, D.C. www.eli.org.

OVER thirty years ago, as a

callow youth running the

Missouri Department of

Natural Resources, I wrote

an op-ed for the St. Louis Post-Dispatch

calling for the substitution of revenue-

neutral pollution fees for existing taxes

on income and productivity — which

I believed made sense environmentally,

economically, and politically.

Quoting from the likes of TEF con-

tributor Robert Stavins, Peter Drucker,

Jack Kemp, and Lester Brown in State

of the World 1991, I reasoned that

revenue-neutral fees would

“internalize the externali-

ties,” imposing costs on the

party that generated the pol-

lution, and could be oset

by reductions in corporate or

marginal tax rates and Social

Security taxes. I did not use

the term at the time, but they

would generate a supply-side

economic boost.

“Using these levies on pol-

lution as a substitute for exist-

ing, counterproductive taxes

on productivity, environ-

mental costs can be incorpo-

rated into how America does business

to forge a new environmental policy for

the next century.” It seemed a surere

way to nd common ground between

the left and right sides of the political

spectrum. It constituted a “no regrets”

approach to dealing with a low prob-

ability but potentially catastrophic chal-

lenge, regarding which I was unquali-

ed to assess.

e “next century” is here, but the

idea has not caught on, although the

New York Times reports that Senate

Democrats are now looking at a carbon

tax in a desperate quest for revenues for

their massive $3.5 to $5 trillion budget.

is is not exactly what I had in mind.

eir plan includes rebates to mitigate

regressive impacts for lower-income

citizens, but there is no supply-side

kick from reducing marginal tax rates,

capital gains, etc. Quite the opposite in

fact. Revenue-neutrality was the key to

my proposed political compromise, but

that seems out of the question. More

on this subject below.

Given my youthful irtation with

pollution fees, I was pleased to take up

Nobel Prize-winning economist Wil-

liam D. Nordhaus’s new book, e

Spirit of Green: e Economics of Col-

lisions and Contagions in a Crowded

World, a very useful introduction to

and argument for market-based ap-

proaches, with an emphasis on “Green

Taxes,” which he deems “the holy grail

of public policy.” Moreover, “ey are

the holy trinity of environmental poli-

cy: they pay for valuable public services,

they meet our environmental objectives

eciently, and they are nondistortion-

ary” — assuming they are grounded

in solid cost-benet analysis. at rst

part of the trinity would indicate his

lack of enthusiasm for the revenue-

neutrality element I held near and dear

decades ago.

Nordhaus, a Yale professor, surveys

the basic concepts pertaining to exter-

nalities (positive and negative), market

eciency and failure, public and pri-

vate goods, cost-benet analysis, and

the English economist Arthur Pigou,

from whom the “analytical thinking be-

hind the Green movement originated.”

e chapters are solid and useful for

anyone unfamiliar with environmental

economics — and often stimulating

and informative even if you are not a

stranger to the subject matter.

Nordhaus also pursues newer ideas,

such as green national accounting, sus-

tainability, ESG (environmental, social,

and corporate governance), socially re-

sponsible investments, and the social

cost of carbon. On this latter point, he

seems to see a price of $40 or $50+ per

ton as just the start of the bidding. is

is the range established by the Obama

and Biden administrations. He thinks

there is justication, nay, ne-

cessity for as much as $200

per ton to eectively ad-

dress the challenge of climate

change, which he believes is

“a major threat to humans

and the natural world” and

“the ultimate challenge for

Green policies.”

“Global warming is one

of the dening issues of our

time,” writes Nordhaus. In-

deed, mitigating climate

change or reducing carbon

emissions will cost in the

range of 2 to 6 percent of

world income or “roughly, $2 trillion

to $6 trillion annually at today’s level of

income.”

Regarding the Green New Deal,

Nordhaus wants to be supportive of

Representative Alexandria Ocasio-Cor-

tez (D-NY) and Senator Edward Mar-

key (D-MA), the prime movers, but he

notes its failure to “include any discus-

sion of using market approaches such

as prices, taxes, or tradeable permits as

instruments of environmental policy.”

He argues that “the inconvenient truth”

of climate policies “require[s] aggres-

sive price-raising measures, probably

through carbon taxes.”

Professor Nordhaus concedes that

Holy Grail

Are Green Taxes the Answer to Pollution?

By G. Tracy Mehan III

In the Literature

The Spirit of Green: The

Economics of Collisions

and Contagions in a

Crowded World. By

William D. Nordhaus; Princeton

University Press; $29.95.

The New Map:

Energy, Climate, and the

Clash of Nations. By

Daniel Yergin; Penguin Press;

$38.00.