Saturday, November 19, 2011

The letter the New York Review of Books didn't want you to read

I can't blame them for not publishing this: my letter is playing small ball on an otherwise insightful piece. Still, in reading this review I came to the realization that environmental economists are misguided in prescribing national energy taxes as a cure to the negative side effects of energy consumption - it's a global issue and individual nations acting on their own can't do much to fix it. p.s. I added some pictures at the bottom to depict the scenario I inadequately described in the second paragraph.

To the Editors:

Dr. Nordhaus introduces an important explanation of the global oil market with his bath tub analogy, but his ultimate policy proposal is unfortunately inconsistent with the analogy. He proposes that the US implement a tax on oil consumption to ensure that its full social cost is paid for by the consumer. However, the very insight his analogy provides is that the oil market is fully globalized; accordingly, an oil tax would need to be imposed on all oil consumers to be effective, not merely US oil consumers.

Consider the effect of a US-only oil tax. The cost of oil in the US increases, decreasing US oil consumption. But while the cost increase is localized, as the bath tub view notes the demand drop is felt globally, driving down the global price of oil. This in turn drives up non-US oil consumption and negates the positive environmental effects of the US oil tax. 

No matter where in the world energy is consumed, its environmental costs are felt globally.  Therefore, only a globally-coordinated response can effectively deal with the social costs of energy. Moreover, this is likely to be a more palatable approach for those concerned with putting the US at a competitive disadvantage to its trading partners.  Indeed, this could be the (all-too) rare case where political expediency and effective environmental policy coincide.

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