So as I was sitting down tonight I was thinking about why I generally support taxing carbon versus spending our way out of climate change, while at the same time I favor financing transit over making it expensive to drive in cities.
Now the first argument is fairly easy. Taxes and subsidies are essentially the same thing at their fundamental basics, and if your goal is to reduce the consumption of a bad (eg oil) then a tax is a very direct policy which will reduce the negative impact which you are trying to fight. If you try to subsidize and alternative when your real goal is to reduce something which is bad, then you could potentially end up having the substitution effect reduce consumption of something else. I’ve written about this before, and the classic example is how when Germany cut nuclear power, coal power increased. A carbon tax wouldn’t have such a perverse outcome.
While a subsidy for renewables will almost certainly reduce some of the demand for fossil fuels in our current economy, it will never reduce the demand for fossil fuels as much as a carbon tax. I don’t even necessarily support spending a carbon tax to finance a renewable energy subsidy unless if that renewable energy subsidy’s cost per metric ton of carbon reduction is greater than that of increasing the carbon tax by the same amount.
For this reason, it is almost always wiser to spend the carbon tax on other problems facing our society because the substitution effect can never be fully controlled, and if subsidizing solar means we get less wind power being built, then that marginal cost is a waste of money which would have been better spent somewhere else.
When it comes to increasing transit use however, couldn’t we just tax the living hell out of driving? Let’s look at various taxes we could do:
- If you use a carbon tax or a gas tax, people will switch to electric cars. While this is a net benefit for the environment, it didn’t do the main goal of moving people towards transit use.
- You can put in tolls. The issue here is that you are not going to toll every road, which means wherever is not tolled is going to still have a lot of private traffic. Toll avoidance is also a very real thing. I-90 is tolled in Chicago, so many people who can go around I-90 will instead take I-294 which is not tolled. The only way to reduce total car usage through tolls is zone-based pricing, where an entire region becomes tolled to enter or drive within a transit area. Some of these people however might be making trips at all, which costs local businesses customers, and will inevitably reduce tax revenue to local governments from those transactions.
- If you simply put in a tax without expanding transit, you are simply raising revenue. The private sector is not going to provide bus service and taxis are not as efficient as buses. The fares for private sector transit will have to be less than the cost of an electric vehicle over the long term in order to cut transit.
- Most people in most places are not going to give up their cars completely. This means you are working within the margin, and you need to think about the margin. Fixed costs such as purchasing a vehicle, and insurance are not going to impact people’s decisions on whether they use transit or drive their car day to day. People are intrinsically comparing the marginal costs (time and money) of driving vs the marginal costs of using public transit for that single trip, and that margin is all you have to work with. Unless if you have a policy which acts on the margin of a person’s decision, that policy is going to fail. This means that each trip has a very small amount of room to work with, and you need to make sure that the overall cost of a transit trip in time and money is less than the cost of driving.
- Increasing the cost of driving without increasing transit funding will inevitably lead to fewer overall trips, which hurts the local economy. Increasing transit funding can help expanding service or lowering fares, both of which help increase overall transit use. People who are in a different neighborhood are more likely to eat at a restaurant, where they will pay sales taxes, and increase corporate taxes owed, which benefits the government. For these reasons, it is in the best interest of governments when reducing congestion to focus not just on reducing car use, but also to increase transit use in order to help the local economy.
One should only increase the cost of driving if reducing car usage is your main intention.
The main difference between climate change and expanding use of transit is that one is trying to end one very clear problem. If you are trying to end something bad, a tax is your obvious policy.
Expanding the number of people who use transit is the opposite problem, so it requires the opposite solution, which is a subsidy.
It’s just that simple.
That being said, if the goal is to both reduce car usage and increase transit usage, the government could choose to both tax car use through parking fees, tolls, and other mechanisms which will reduce driving in conjunction with reducing fares or improving service which will increase transit use without harming local jobs. This joint policy has the benefit that it guarantees car usage will decline and transit use will increase, and is a good idea.
But if I had to choose between only one policy to increase transit use, the subsidy will always be more efficient.
References:
Pricing Strategies and Their Effect on Public Transportation – US DOT