Put this paper in (AEA) style.

Austin Belman 
ECON 415 

 
Literature Review of Greg Mankiw's "Smart Taxes: An Open Invitation to Join the Pigou Club" 

 

In "Smart Taxes: An Open Invitation to Join the Pigou Club," Greg Mankiw advocates for the implementation of carbon or gasoline taxes as effective measures to address the negative externality of carbon emissions. He asserts that, without governmental intervention, individuals and businesses will emit excessive carbon dioxide, leading to environmental degradation. Mankiw posits that Pigovian taxes on energy-related products are the most efficient and cost-effective strategies to mitigate carbon emissions. These taxes not only incentivize individuals to reduce their carbon footprint but also generate government revenue, which can be used to lower other taxes or fund public initiatives. 

 

Mankiw critically examines two prevalent alternative approaches to limiting carbon emissions: Corporate Average Fuel Economy (CAFÉ) standards and cap-and-trade policies. CAFÉ standards require automakers to produce a certain percentage of fuel-efficient vehicles. While these standards are perceived positively by the public, who believe they benefit consumers by promoting greener cars, Mankiw argues that CAFÉ standards effectively act as a tax. This is because automakers pass on the increased production costs to consumers through higher vehicle prices. Furthermore, Mankiw highlights a rebound effect: improved fuel efficiency may lead to increased driving, offsetting the environmental benefits and exacerbating issues such as traffic congestion, road accidents, and pollution. 

 

Regarding cap-and-trade systems, Mankiw contends that, although these policies can lead to higher energy prices similar to a carbon tax, they fail to generate government revenue. Instead, the revenue from the sale of emission allowances remains with power companies and other carbon emitters. This lack of public funds limits the government's ability to use the generated revenue to offset other taxes or support initiatives aimed at mitigating the economic impact of higher energy costs. 

 

Mankiw summarizes his critique by labeling CAFÉ standards and cap-and-trade systems as "pseudo carbon taxes." He argues that these measures are ineffective at significantly reducing energy consumption and do not provide the government with resources to lower other taxes or compensate consumers for increased costs. 

 

The public’s resistance to carbon taxes, according to Mankiw, stems from a misunderstanding of economic principles and the perception that such taxes are regressive. Many individuals fear that higher energy prices will disproportionately affect low-income households, exacerbating economic inequality. Additionally, the term "tax" carries negative connotations, leading to political resistance despite the potential societal benefits of reduced carbon emissions. 

Politicians, driven primarily by the incentive to secure reelection, may oppose carbon taxes as their implementation is often unpopular. Campaign strategies typically focus on offering direct benefits to constituents rather than imposing taxes, making it challenging for politicians to endorse carbon taxation. Mankiw observes an ideological divide: Democrats generally support increased regulation and expenditure on environmental initiatives, while Republicans tend to resist regulatory approaches altogether. 

 

In addressing these concerns, Mankiw offers several counterarguments. He downplays the long-term cost of global warming by emphasizing more immediate externalities associated with driving, such as congestion and accidents, which are more tangible and pressing economic issues. By focusing on these factors, Mankiw seeks to garner broader support for carbon or gasoline taxes. Additionally, he contends that the United States' significant importation of the world's oil grants it considerable market power. Implementing a carbon or gasoline tax would reduce domestic oil consumption, leading to lower global oil prices and causing oil producers to absorb a portion of the tax burden, thereby lessening the impact on consumers. To further protect consumers from volatile fuel prices, Mankiw proposes suspending carbon taxes when gas prices exceed certain thresholds until prices stabilize. He argues that current gasoline taxes are insufficient, which may incentivize organizations like OPEC to manipulate prices if the U.S. does not respond effectively. Furthermore, Mankiw challenges the notion that carbon taxes are regressive by suggesting that the revenue generated can be used to reduce other taxes, thereby redistributing the financial burden more equitably across different income groups. This approach can mitigate the adverse impacts on low-income households, rendering the tax policy progressive. 

In conclusion, Greg Mankiw's "Smart Taxes: An Open Invitation to Join the Pigou Club" presents a robust argument for adopting Pigovian taxes on carbon and gasoline as superior alternatives to CAFÉ standards and cap-and-trade systems. By addressing common criticisms and proposing mechanisms to alleviate potential negative impacts, Mankiw underscores the economic and environmental advantages of carbon taxation as a tool for reducing carbon emissions and promoting sustainable energy consumption.