Tentative ceasefire demonstrates wisdom of carbon tax

The good news from Europe is that Russia and Ukraine announced that they had, with the help of Germany and France, reached a tentative peace accord. Much needs to be done but one of the most more positive signs that peace may break out is that Russian President Vladimir Putin, German Chancellor Angela Merkel confirmed, put pressure on anti-Ukraine rebels to agree to the truce.

Merkel and French President Francois Hollande dangled in front of Putin the prospect of lifting asset freezes and travel bans in return for a cessation of hostilities.  The Russian economy has been hit hard by the recent 50% drop in oil prices on world markets and the thinking is that Putin can ill-afford both  sanctions and on-going hostilities between Ukraine and pro-Russian separatists even if the latter only require him to station additional troops on the border.

The economic damage that lower retail petroleum prices can do to tyrannical rulers has been noted before.  But this arguably salutary effect is more than counterbalanced by the increase in greenhouse gases that results when gasoline is cheaper for consumers.  Still, there is a way for us to have our cake (reduced CO2 emissions), and eat it too (weaken autocrats).

The solution – a significant enough tax on gasoline at the pump to achieve a marked reduction in consumption – is obvious.  Higher energy prices paid to producers enriches petro-state dictators. By contrast, higher energy prices due to a consumption tax mean far less revenues for oil producing countries.

A high sales tax jars producers with a one-two punch.  First the reduced demand, that always accompanies higher prices, means a reduction in the total number of barrels sold.  Second, research shows that when faced with new sales taxes imposed on a particular good or class of goods, distributors may absorb some of the tax increase by decreasing wholesale prices and retailers may likewise reduce their markup.  So, increasing the gas tax means that oil-exporting countries, like Russia, Saudi Arabia, and Iran, will sell less oil at lower prices.

With less cash, the bellicosity of the rulers of these countries and ultimately their ability to maintain power may be impacted.  Certainly, such expected developments will pose challenges for western democracies. But in the end the benefits of 1) reducing greenhouse gas emissions and 2) defanging religious extremists and forcing old-school despots like Putin to scale back or even forego imperial ambitions make the risks well worth taking. This is especially so if the tax revenues are returned to the people in the form of rebate checks as recommended here thereby enhancing the absolute and relative economic status of the poor, working people, and the middle-class.