The Five Circles of Carbon Tax Hell
“The tax will not be implemented in the politically aseptic world of academic modelers, but in the real world of intense political pressures. Its assumed purity will not survive the onslaught [as demonstrated by] … Sanders-Boxer [where] the carbon tax is treated as a huge honeypot for allocating money to powerful groups, including overseas interests.”
The carbon tax, a serious proposal supported by some thoughtful people, deserves careful consideration. This tax is the subject of an extensive and often technical literature with top scholars making proposals for Resources for the Future and for the Brookings Institution.  The term “carbon tax,” however, has a chameleon-like quality, meaning something different in each of three different contexts.
In the context of economic theory, the carbon tax is a way to deal with an imperfection in the energy market. In this world, carbon dioxide (CO2) emissions cause harm for which the emitter does not pay. The purpose of the tax is to impose the full cost of his activities onto the user of carbon-based fuel, so as to force him to incorporate the cost of the harm into the price of the fuel. Once the level of harm and its costs are included in market prices, then the energy market will work properly.
In this formulation there is no preconception about the proper level of the tax or the final outcome of the competition between sources of energy. The tax is set by careful assessment of the costs of the harm caused by the emissions, and the level of use of carbon fuels is then determined by market prices.
In the context of tax theory and government finance, the carbon tax has a different function. It is a way to finance government and replace other levies. In this world, the goals are to maintain economic efficiency and tax equity, while, as in any tax system, plucking the most feathers from the geese that squawk the least.
In the context of environmentalism, a carbon tax can reduce emissions of the “pollutant” CO2. In this world, the limitations, caveats, and subtleties of the contexts of economic purity or tax policy do not apply. The reduction targets are not limited by any empirical estimate of the harm caused by CO2 — or by any concern that the level of a tax might rise so far as to become economically destructive.
Five Mega Problems …
In public and political discussion, the distinctions between these three contexts tend to get blurred, and arguments applicable to tax or economic issues are often incorporated into the environmental debate, despite the fact that in this context the carbon tax of economic theory or tax analysis is fiction. Political realities will determine the size of the tax and the disposition of the revenues. Politicians will be sensitive to the costs imposed on voters, and interest groups will fight for exceptions or subsidies to mitigate the effects, with the actions of each unhinged from the theoretical efficiency of the tax.
Viewed in this perspective, the carbon tax is a bad idea that should be rejected. Rather than a simple path to a benign energy future, the carbon tax is the proverbial Garden Path, or the road to Hell that is paved with good intentions. In the course of its inevitable failure, it would cause serious economic damage to the United States at a time when the nation’s economy is already under stress.
Carbon Tax Hell has five circles:
* The first consists of erroneous expectations about the ability of a carbon tax imposed in the United States to affect global temperatures. The assumption is made, usually tacitly, that of course a carbon tax would reduce future temperatures, and this would justify the costs and sacrifices involved. The proponents of the tax let people think this, but they do not attach a specific number to the predicted temperature reduction.
In fact, the impact would be tiny. The projections of the Intergovernmental Panel on Climate Change (IPCC) about the effects of CO2 on warming are highly suspect (see full paper for more). However, even if the IPCC conclusions are taken as accurate, a drastic 83 percent reduction in CO2 emissions from the United States over the next four decades would reduce global temperatures by 0.11°C, which is 4 percent of the IPCC’s midrange warming estimate of 2.96°C over the next century. (As discussed in the full paper, the IPCC’s models overstate the future impact of CO2 on temperature, so the actual impact of U.S. action would be infinitesimal rather than just tiny.)
* The second circle of hell consists of a lack of specificity about future sources of energy. The chart on page 3 shows current sources of energy in the United States. Advocates of a carbon tax lack any realistic chart showing energy sources in the future, after a carbon tax has produced some desired amount of reduction in CO2 emissions, such as the 80 percent target of Sanders-Boxer. Nor do these projections show any path for getting to a new constellation of energy sources.
In the absence of identification of specific technologies and their attainability, any discussion of significant CO2 reduction becomes a variation on the story of Peter Pan. If we all believe real hard, Tinkerbell will appear in the form of an Energy Fairy.
* The third circle contains problems with the basic theories used to support the carbon tax. In economic theory, taxes on bad things are intended to compensate for the fact that some of the harms caused by the bads are not paid for by the producers.
They spill over and land on others. Because the producers do not incur the full costs, the bads are over-produced. This theory is correct, but incomplete. It does not account for the complementary
principle that many benefits of an activity or product are not captured by the producer.
These, too, spill over to the advantage of others. Because the producers do not get all the benefits, they will produce less than they would if the costs and benefits were both concentrated in the hands of those responsible for the activity.
A simple example is that when a homeowner paints his or her house, the whole neighborhood benefits, while letting the house go to ruin harms everyone. Housing developments deal with this issue by requiring each owner to maintain his property at his own expense, so that all pay and all benefit from the actions of the others.
Discussions of a carbon tax focus on the negative spillovers, that is, on possible damage from CO2 emissions. But the spillover benefits of energy are also immense and difficult to measure. As depicted in the chart on page 16, increased use of energy, and especially cheap energy which is largely carbon-based, is intertwined with the extraordinary increase in global wealth over the past two centuries.
A policy focused only on the negative side presents an unbalanced picture. Also, objective studies of the impact of an increase in CO2 in the U.S. establish that there will be positive benefits from the increase. Imposing a carbon tax to reduce the emissions would forego these benefits as well. Again, accentuating the negative without referring to the positive distorts the picture.
* The fourth circle concerns mathematical modeling. Advocates of a carbon tax must rely on two rounds of models, an initial round of models for the climate system and a second round addressing the economic impacts of a carbon tax. Modeling is a highly uncertain business, full of opportunities for error. Scrutiny of the relevant
existing climate and economic models finds major uncertainties in both sets. Betting the nation’s economic future on them would be folly.
* The fifth circle of Carbon Tax Hell contains the political realities. Economist Bruce Yandle coined the term “Bootleggers and Baptists” to express a fundamental reality of public affairs: programs and policies are often supported by an alliance of “Baptists,” whose support is based on moral fervor, and “Bootleggers,” who smell profit. The term comes from the many contests over state laws forbidding liquor sales, which were supported both by those who opposed drinking and those who profited from selling illegal liquor.
A carbon tax is supported by multiple sets of both Bootleggers and Baptists: idealistic environmentalists, crony capitalist subsidy seekers, investment banks in quest of trading profits, government spenders who see a new source of revenue and power, and the recipients of the $280 million in foundation money that goes each year to the field of climate change/energy.
… and Six Reality Checks
The tax will not be implemented in the politically aseptic world of academic modelers, but in the real world of intense political pressures. Its assumed purity will not survive the onslaught. The problem areas include:
* Its negative effect on GDP & jobs, especially over the long term;
* Its regressive nature;
* Its harm to energy-intensive industries, including their employees and regions
of the country dependent on them to be economic drivers;
* The unlikelihood that it would increase the efficiency of taxation, trigger a repeal of other taxes, or be administered in neutral fashion;
* The unlikelihood that it would trigger reform of other regulations;
* The need for complex and improbable international arrangements and the unlikelihood that China, the most important source of CO2 emissions, would join such a scheme.
The tax will not be implemented in the politically aseptic world of academic modelers, but in the real world of intense political pressures. Its assumed purity will not survive the onslaught. The proposed Sustainable Energy Act and Climate Protection Act (Sanders-Boxer), for example, illustrates the political pressures at work. In that bill, the carbon tax is treated as a huge honeypot for allocating money to powerful groups, including overseas interests.
Should we ever expect anything better in the real world of “politics without romance“?
1. Resources for the Future, “Considering a U.S. Carbon Tax: Frequently Asked Questions,” December 2012. ; Adele Morris, “Proposal 11: The Many Benefits of a Carbon Tax,” in Brookings Institution, The Hamilton Project, 15 Ways to Rethink the Federal Budget, February 2013.
2. Chip Knappenberger, “Carbon Tax: Climatically Useless,” Master Resource, Dec. 3, 2012; Knappenberger, “Climate Impacts of Waxman-Markey (the IPCC-based arithmetic of no gain),” Master Resource, May 9, 2009.
3. Bruce Yandle, “Bootleggers and Baptists-The Education of a Regulatory Economist,” Cato Institute, Regulation, May/June 1983, p.12. See also the follow-up, Bruce Yandle, “Bootleggers and Baptists in Retrospect,” Regulation, October 1999.
James V. DeLong is Vice President & Senior Analyst of the Convergence Law Institute, a non-profit organization dedicated to research and education on public policy issues, especially in the areas of energy, technology, and intellectual property.
This post is taken from DeLong’s “A Skeptical Look at the Carbon Tax,” released today by the George C. Marshall Institute in Washington, D.C.
An adjunct scholar with the Competitive Enterprise Institute and the Heartland Institute, DeLong has previously held positions as Senior Fellow at The Progress & Freedom Foundation; Senior Analyst at the Competitive Enterprise Institute; Vice President of the National Legal Center for the Public Interest; Research Director, Administrative Conference of the United States; and Assistant Director for Special Projects, Bureau of Consumer Protection of the Federal Trade Commission; and Senior Analyst, Office of Program Evaluation of the United States Bureau of the Budget.
Mr. DeLong graduated magna cum laude graduate from Harvard Law School, where he was Book Review Editor of the Harvard Law Review, and a cum laude graduate of Harvard College, where he majored in U.S. History. His most recent book is Ending ‘Big SIS’ (the Special Interest State) and Renewing the American Republic (CreateSpace 2012).