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The politics of carbon taxes versus clean energy subsidies

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Economists on both the left and the right tend to favor carbon taxes as the most efficient way of addressing global warming. In contrast, politicians on both the left and the right are reluctant to embrace this approach, due to a perception that carbon taxes are highly unpopular. Instead, politicians often implement something less effective: clean energy subsidies.

But why are carbon taxes unpopular? When economists say a policy is “more efficient,” they usually mean it results in a higher level of real income for society. What if a carbon tax passes this test, and is a superior approach to policies that are already in place? Here, I’ll argue that an appropriately constructed set of carbon taxes would not have to be politically unpopular.

To understand the politics of carbon taxes, we need to begin by recalling that economists view terms such as “taxes” and “subsidies” differently than the general public does. Economists know the concepts to be quite similar — two sides of the same coin. Both move money from one group to another, and both raise the relative price of some goods and reduce the relative price of other goods.

Many non-economists see taxes and subsidies as being quite distinct: […]

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