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Dumb Question: Do We Need Washington If the S&P 500 Say They're 'Sustainable'?

It's not every day you meet Republicans (or really, anyone) who advocate for a U.S. carbon tax. Then again, not everyone is a determined advocate of so-called Pigovian taxes, the phrase economists use for levies on activities we probably shouldn’t be doing anyway.

For the Pigovian-inclined, a tax on carbon pollution is much more attractive as policy than a tax on things we want more of — like payroll earnings or corporate income. A carbon tax would be "revenue neutral" if the new government income was used to eliminate taxes elsewhere, as opposed to adding the income to the general treasury or using it to fund clean-energy science.

This week's Dumb Question goes to Eli Lehrer, president and co-founder of the R Street Institute , a think tank focused on free markets. He appeared at a Bloomberg Government breakfast last week with Bob Inglis, the former Republican congressman from South Carolina who is now executive director of the Energy and Enterprise Initiative at George Mason University.

Inglis and Lehrer are taking the case for a carbon tax to Republican and libertarian audiences around the country.

Dumb Question: Large companies are reducing their own emissions. You can go to these sustainability confabs and there's a sense that they can do it all on their own. So, why do Washington and policy even matter, like, at all?
Eli Lehrer: Vis-a-vis climate change I think there's a decent point for that. I like Pigovian taxes. That's why I'm in this. If it could be proven to me tomorrow that a revenue-neutral carbon tax would increase emissions, I'd still be in favor it of it; as long as you could swap it out for taxes that are a big dead-weight loss on the economy [like payroll taxes and corporate income taxes]. It's a good way to collect revenue to fund government functions.

So yeah, in terms of climate change I think a carbon tax could help. It could show leadership. Carbon is not my number one priority even vis-a-vis climate change.

DQ: What is?
EL: The more important responses to climate change are ending subsidies for areas that are in harm's way, having risk-based insurance rates everywhere and trying to be as prosperous as possible in the future.

The subsidies I'm talking about all relate to development. Although some of them -- say, roads that lead to a [risky] area -- are indirect subsidies, and others, such as beach nourishment or the mortgage interest deduction as it currently exists, may have a major purpose besides simply promoting real estate development per se.

I'd also add crop insurance subsidies, which are the largest and most direct, to that list.

Risk-based insurance rates are rates that reflect the actual risks of doing business or living in a certain place, and that are set by market rather than political forces. Right now, insurance prices encourage enormous numbers of people to live in harm's way.

That's a more effective response if you're narrowly focused on climate change. I think those things are probably more important than a carbon tax. But a carbon tax is just very good tax policy.

Transcript edited for length and clarity. Analysis and commentary on The Grid are the views of the author and don't necessarily reflect the views of Bloomberg News.

Visit www.bloomberg.com/sustainability for the latest from Bloomberg News about energy, natural resources and global business.

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