Why this conservative economist supports a carbon tax in Washington

Editor’s Note: In April, Making Sen$e reported on Initiative 732, which proposes imposing a tax on carbon emissions in Washington state. The carbon tax would be revenue-neutral. That is, the revenue from the tax on carbon emissions would go to reduce other taxes in the state — most notably, the sales tax and the business tax. The initiative has gained support from unlikely places, chief among them, Gregory Mankiw, a conservative economist and former head of George W. Bush’s Council of Economic Advisers. Below, Mankiw explains why he and other economists of different political persuasions support the carbon tax and why certain environmental groups don’t.

Ahead of the Nov. 8 vote, the future of the initiative is uncertain — the most recent poll showed 42 percent in favor and 37 percent against. For more on the topic, tune in to tonight’s Making Sen$e report, which airs every Thursday on the PBS NewsHour. The following text has been lightly edited for clarity and length.

— Kristen Doerer, Making Sen$e Editor

GREGORY MANKIW: The first principle of economics is that people respond to incentives. What carbon tax tries to do is try to harness that principle to get people to reduce their carbon footprint.

PAUL SOLMAN: And the incentive is…

GREGORY MANKIW: Any time you put carbon in the atmosphere, you’re going to pay a price for it. So if you drive your car a little bit more, you’re going to pay a little bit more for that. If you use a little more electricity generated by coal, you’re going to pay a price for that. So what we want to do is we want to give people price incentives to reduce the amount of carbon they emit into the atmosphere.

READ MORE: Washington state’s carbon-tax plan, cartoonified

PAUL SOLMAN: And carbon is what economists call a negative externality, right?

GREGORY MANKIW: That’s right. Scientists tell us that carbon released into the atmosphere has adverse effects on the climate. That is a classic example of a negative externality, meaning a side effect associated with a certain form of economic activity. What economists want to do is they want to internalize the externality. That means they want people to pay for the adverse side effects. When you have a side effect on somebody else, you pay for it, so you take that into account when you make your day-to-day decisions.

PAUL SOLMAN: So if I use energy that comes from some source that generates carbon — a bad thing — you want me to pay for the bad and you do that by imposing a tax.

GREGORY MANKIW: Exactly. When you go buy a good, you pay for the resources that go into producing that good. So if something’s made out of metal, you pay for the metal indirectly through the price of that product. When you emit carbon, you are basically using up a resource, a valuable social resource, which is the atmosphere, and what we want you to do is to pay for that resource you use up when you are buying that high carbon-intensive product.

PAUL SOLMAN: So a carbon tax seems to be a good thing. Why is there so much opposition to it?

GREGORY MANKIW: Well, there are some people who don’t believe that climate change is real. But scientists tell us that is not the case, so I take the scientists at their word. Some people are afraid that if we have a carbon tax, people are going to use it as an excuse for more taxes and bigger government. And that doesn’t have to be the case. A carbon tax can be revenue neutral, meaning that you impose a carbon tax on carbon-intensive goods and use that tax revenue to refund it by reducing other taxes or by giving people a carbon dividend.

PAUL SOLMAN: And that’s how the referendum in Washington state is written, so that it’s revenue neutral?

GREGORY MANKIW: That’s right. They’re going to impose a tax on carbon, and they’re going to get more money from that, and they’re going to reduce other taxes, largely the sales tax. So you will pay more when you buy a carbon-intensive good, but you will pay less when you buy lots of other goods that aren’t carbon intensive, because the sales tax will have gone down.

PAUL SOLMAN: There’s an argument as to whether that’s going to generate or decrease economic activity in general, right?

GREGORY MANKIW: Well, there is some debate about that, and what it’s going to really do is shift economic activity away from high carbon-intensive activities towards low carbon-intensive activities. As long as it’s revenue neutral or approximately so, it shouldn’t have an overall macroeconomic impact. It’s going to change the composition of what we’re doing away from stuff that’s harming the environment towards stuff that’s cleaner.

PAUL SOLMAN: You are a Republican, head of George W. Bush’s Council of Economic Advisers, and you’re in favor of this, while almost every environmental group is against it. How can that be?

GREGORY MANKIW: One reason I’m in favor of a carbon tax, even though I view myself as a conservative, is that I view this as a conservative approach to dealing with climate change. The alternative to giving the people the right incentives and letting them make free choices is to regulate their behavior and that’s what we’ve been doing to a large extent for a variety of pro-environmental regulations. If we give people the right incentive with the carbon tax, then a lot of those regulations will become unnecessary because people are automatically incentivized to do the right thing.

Now the reason that some of the environmental left is opposed to this is that they don’t like the fact that it is revenue neutral. Some people see this carbon tax as a way to fund projects that they would like to have funded, so they see it as one vehicle for larger government. My perspective, I view this as a way to clean up the environment without expanding government by shifting from one kind of tax to another kind of tax.

PAUL SOLMAN: So you’re not surprised that environmental groups are against this?

GREGORY MANKIW: I am somewhat surprised because I think if their main interest is cleaning up the environment, this is the right thing to do. I think economists from right, left and the center view carbon taxes as the most effective policy for reducing carbon emissions, so therefore, I think anyone worried about climate change should gravitate towards this.