Here are some quick and scattered thoughts that occur to me with respect to optimal carbon taxation in a recession. This isn’t meant to be a complete analysis, but merely a few things to consider.
In a recession we want to increase consumption spending whereas normally, or at least before this recession, more savings and less consumption is a good thing if anything. We’re also seeing some evidence that price elasticity of demand for gasoline is rising in the recession as people become more sensitive to costs, meaning the decrease in consumption for every dollar of carbon tax will be larger now. So any taxation that decreases spending is going to be more costly in a recession than not.
On the other hand, one can imagine carbon taxes primarily causing energy firms to make long-term capital investments in greener equipment today and only raise their prices slightly as marginal costs go up only slightly. It’s also easy to imagine carbon taxation being designed in a way to encourage this outcome, such as by phasing it in slowly or into the future at some point.
However, some workers may be complimentary to the old capital but not the new capital. The costs to laid off workers who must find a new industry are much higher in this economy than normal. If instead of affecting the timing and mix of capital spending among existing firms, the taxation causes a structural shift in industry, where new firms enter and old firms exit, this is a problem.
The basic problem is that the normal dynamism of creative destruction is more costly when it is harder for displaced workers to find new jobs. For this same reason I have concerns about suggestions that now is the right time to engineer a massive tax simplification plan, as this would perhaps hundreds of thousands of accountants out of business. In normal times I am the first to try to assuage concerns about creative destruction like this, and my point here is not that these changes aren’t worthwhile in a recession. I’m simply pointing out that some adjustment costs are higher now.
My biggest concern about carbon taxes in a recession is about sustainability and branding of the policy. One of the lessons of the current malaise is that any policy passed in a long recession stands the chance of being labeled part of the problem. In a short recession this could work the opposite, and that any policy passed will be seen by some people as contributing to the recovery.
One could help mitigate this by structuring a carbon tax bill so that is clearly and significantly contributes to the recovery. You could tie it to large, even obscenely large, mobility stipends paid displaced energy industry workers. Think of this as a bailout for coal counties. You could tie the tax to a bill allowing free citizenship to anyone with a college degree in math, science, or engineering, and charge them a fee that is used to fund an unconditional payment to every native tied directly to the headline immigration number that year.
In any case, my two-handed economist advice is that if any carbon tax were to be passed we should think about it differently than we would in normal times, as the relative costs have changed.
ADDENDUM: On twitter, @jeremyreff rightly points out that “carbon tax adoption and job displacement have to be read in context of tax that it would replace (i.e., payroll)”. This is an important aspect of the problem to be considered. If the carbon tax occurs in the future, and the money is spent today, perhaps via lower payroll tax, to make it revenue neutral then it is no different than normal fiscal policy except the outcome is more efficient. Are people more or less likely to exhibit Ricardian Equivalence when the future tax raise is a carbon tax?
ADDENDUM 2: Rational and forward looking will not necessarily exhibit Ricardian Equivalence if payroll taxes go down now and are offset by future carbon taxes. This is because people may respond in two ways to expected higher future energy costs: save the money they get from lower payroll taxes to pay their higher future bills, or invest it in more efficient energy technology that will lower the future bill. In this way, Ricardian Equivalence seems less likely to be a problem for future energy taxes than other kinds of taxes, since some available means of future cost mitigation stimulate current demand rather than just savings.