## Monday, March 19, 2007

### Carbon tax questions

Greg Mankiw criticises David Friedman who is worried about what politicians will do with the gigantic tax revenues that come out of a carbon tax.

I think there is a way out which can satisfy all parties: this is Martin Feldstein's idea of having tradeable carbon vouchers. In brief, the idea is that the government should only setup an enforcement machinery, and every citizen should get a voucher entitling X amount of carbon emissions a year. After that, the rich will buy vouchers from the poor, thus achieving a new distribution of the emission rights, in a way that avoids having this money flow into the exchequer [link, link]. This is the ideal solution for the carbon problem: a target level of emission is achieved, using the most efficient solution in terms of modified technology and consumption, while avoiding the political economy problems of a large tax/GDP ratio.

1. Or there is the example of London. London metro imposes parking fine apparently to control congestion and pollution in London area. The local government charges people left and right and fines are hefty. (In one case the people charged of collecting these fines actually painted No Parking sign after the car was parked and fined the car! It was captured by a mobile camera.) And guess where the money goes. That's right - to the bureaucracy to keep the whole thing going!!

Now the major (a nut case) wants to expand the region to impose fine. Guess where the additional revenues would go!

The government will never let money slip away in any kind of foolish voucher programs when they have so many plans to spend it. It's better not to have any taxes in the first place - additional burden on the not so well off.

2. Chandra,
it seems you getting a number of things wrong.
I suppose the scheme that you are talking about is the London Congestions charge, which is not a parking fine but a charge on driving into central London during daytime. As you presumably live in London you know that we have a problem there: weekdays during daytime London is simply chronically congested. This is not only annoying it costs real money: delivery vans are longer on the road, highly paid professionals waste their time in taxis, etc.. It makes perfect economic sense to regulate the limited space on the road by giving people that have non essential business to do an incentive to avoid the roads at peak times. A congestion charge is the perfect instrument for that and it can generate a net return in this way even if the revenue is thrown away. It so happens however that the there is some net revenue (around 120 Million Pound according to this ) which is invested into improvements to the transport system.

This is not to say that the scheme could not be improved. For example it is fairly crude at the moment. The whole of the daytime is considered peak time even though there are certain times during the day when congestion is much less severe than at others. Equally I am all in favour of keeping a close eye on what Livingstone is actually using the money for.
But the overall system is sound and the only alternative is ignoring the problem alltogether.

3. When these fines are imposed, people will become more conscious, any type of fine will make people more aware of the damage being done.

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