Regulating Carbon Emissions

In a recent editorial in the New York Times, Eduardo Porter took issue with new energy efficiency standards signed into law by President Obama that will require cars and light trucks to reach 54.5 miles per gallon by 2025. Porter does not take issue with the objective of these regulations, but argues that it could be achieved more efficiently through other means; namely, a higher gas tax:

Consider how a gas tax would work. Because it would make gas more expensive at the pump, we would drive less. When time came to replace the old family S.U.V., we would be more likely to consider a more fuel-efficient option. As more Americans sought gas-sipping hybrids, carmakers would develop more efficient vehicles.

Because the regulations signed by President Obama apply only to new vehicles, they will not have the same immediate effect on consumer behavior that a gas tax would. They are also far more expensive to administer than a gas tax would be, so much so that some economists estimate the costs outweigh the benefits.

The issue at hand is one of a negative consumption externality similar to what we have studied in class. An individual's consumption of oil negatively affects others through the carbon emissions it produces, which can cause asthma, acid rain, and have been linked to global climate change. Both options presented in the article -- the regulations signed by the President and the gas tax advocated by Porter -- involve government intervention; thus, there is no Coasian solution offered that relies purely on the market to resolve the externality. Porter's solution, however, uses government action to alter incentives and then relies on market forces to bring the market to the socially optimal equilibrium. Taxes of this kind that have the aim of reducing a behavior with a negative externality are referred to as Pigovian Taxes, after the economist Arthur Pigou, who developed the concept of externalities. Pigovian taxes may be the most efficient solution to the externality, but, as Porter notes, increased taxation is not feasible in today's political environment, leading us to the second-best solution of externally imposed regulations.