Friday, February 17, 2017

Very, Very Unfair

There was a lot of head shaking going on in the Senate Energy Committee recently at the very thought of taxing pollution control and carbon sequestration equipment. How could it possibly be right to impose the business equipment tax on that stuff? After all, companies only install it because the government forces them to, and having it around certainly doesn’t help them make money and stay in business. As Donald Trump would put it, "Very, very unfair!" Right?

Well no, not really. In the interests of both efficiency and fairness, we usually expect any firm that wants to stay in business to cover its costs.  That includes the environmental costs it imposes on the public, which are just as real and economic as wages, utility bills, rent, bank charges, raw material purchases and other costs incurred in markets. How we get firms to internalize (that is, actually pay for) environmental costs varies from case to case. Sometimes we actually price pollution (think carbon tax), but more often we simply cap pollution levels or require the use of pollution control equipment.

So having mandated pollution control equipment on hand does help firms stay in business and make money because it reduces the environmental damage they would be financially responsible for if they didn’t have it. If they complain that pollution control equipment is not a valuable and productive asset, these companies are implicitly claiming that were it not for government, they would have the right to wreak havoc on the environment with no financial consequences.

And if they claim that being made financially responsible for the environmental damage they might do will drive them out of business, so be it. That simply means that whatever they’re producing isn’t worth what it costs to produce it. By the cold logic of the market, they are just too inefficient to keep the doors open.