Real Politic: Carbon Tax Pessimism (Part II)
“You can rank carbon regulations, carbon cap-and-trade, and carbon taxes however you wish. But at the end of the day we’re better off with no policy rather than bad policy.”
To continue from Part I yesterday, the carbon tax–on paper, on the white board, in the ivory tower–is better policy than cap-and-trade, which is better than ad hoc regulation. We could spend – and have spent – hundreds of hours explaining why cap-and-trade is a horrible idea, and why regulations are often blunt-objects that often cause huge unintended consequences, but that’s beyond this post.
And an ideal carbon tax can be shown to have only modest damage to the economy.
But where are carbon tax proponents, particularly conservatives, wrong about carbon taxes? The answer provides a much longer list.
First, carbon taxes are not strictly a tax on “bads” (i.e. greenhouse gases), they are a tax on economic inputs: virtually all economic activity relies on energy consumption. In that regard, carbon taxes are taxes on both bads and goods. Sure, they tax greenhouse gases, but they also tax food, medicines, clothing, housing, transport, etc.
And in this sense, we already have carbon taxes. The U.S. (andCanada, and much of Europe) already have dozens of hidden carbon taxes–vehicle fuel economy standards, appliance standards, renewable fuel mandates, building insulation standards, mass-transit subsidies, etc.
All essentially forced energy “conservation” (called conservationism at this blog) is primarily to reduce emissions of all sorts, but largely GHGs, given that pollutants are covered by other regulatory regimes.
1. Additive, Not Neutral
As I mentioned earlier, carbon taxes will not be in lieu of regulations and standards, they will be on top of. I have never heard a single environmentalist or regulator offer to rescind vehicle fuel economy standards, appliance standards, renewable fuel standards, or anything else in place of a carbon tax.
And imagine the stink if they did: automakers, appliance makers, contractors, and everyone else who has had to re-tool their products to government specs or build non-economic forms of energy production such as wind or solar power would have an absolute fit – and rightfully so in many cases. They’ll have done what they were told to do by the government, which, from their point of view, would be changing the rules in bad faith.
Virtually all economists agree that a carbon tax would be regressive: poor people live in older, less insulated spaces, use older and more energy-consuming appliances, drive older, lower-mileage vehicles, drive long distances to work where they can’t afford to live, etc. So, the poor spend more of their money on power than the better-off as a share of annual earnings. That means if you hike power prices, the pain is felt by the poor more than the rest of society.
Yes, you can fix the regressivity problem by redirecting revenue to the poor. But if you fix the regressivity problem, you just distort the economy more, and on top of that, you undermine the incentive to conserve among the very people who emit a lot of greenhouse gas emissions.
3. Geographically Discriminatory
Carbon taxes are not only economically regressive, they’re geographically discriminatory – some places are blessed with a lot of hydro, others have natural gas, and some have a huge quantity of coal. Areas with ready access to low-carbon forms of energy will pay less in taxes, while areas without low-carbon forms of energy will be hit hard by carbon taxes. Either they’ll have to pay the tax and continue using higher-carbon forms of energy, or they’ll have to re-tool their power plants and rely on higher-cost imported fuel or electricity from elsewhere.
As with the regressivity issue, if you try to fix that with wealth transfers via the tax, you just exacerbate the economic damage, and undermine the entire enterprise.
4. Real Politic: Contamination
The odds of a carbon tax being implemented in the ideal format are extremely slim. No such tax has been proposed in theUSoutside of opinion columns.
If by some miracle such a scheme was implemented, pressure to decouple the revenue neutrality and raise the tax would be immediate. This has happened in Alberta (which has a hybrid tax/trade system), where environmentalists are calling for the tax to be hiked, and British Columbia, which did implement something close to the “ideal” revenue neutral carbon tax. There too, in the most recent election, environmental groups were pushing to hike the tax and de-couple it from revenue neutrality to spend on pet projects.
And we’ve already seen the future of this in the U.S., which recently raised the “social cost of carbon” (SCC) estimate from $22/ton to $36/ton, which would have to be, almost certainly, the basis by which the initial tax rate would be set. The SCC was originally set at $21/ton in 2010, and it’s up to $36/ton only 3 years later – a 67% increase.
As for revenue-neutrality, well, color me dubious. Governments are notorious for raiding “dedicated” funds whenever they face revenue shortfalls. Governor Jerry Brown recently raided California’s dedicated green fund raised through its cap-and-trade system. Technically, he “borrowed” $500 million from California’s Greenhouse Gas Reduction Fund for general revenue.
Might Brown or his successor pay it back? Who knows. Even if they do pay back the “loan,” that won’t “undo” the consequences: as environmentalists point out, the loan will delay the implementation of various programs that were intended to cut GHG emissions in the near-term, a delay that won’t be recouped even if the loan is repaid.
5. Unilateralism: Climate-effect Dilution
Unilateral imposition of such a tax would offer little to no climate benefit. The idea that China and India would follow the US “lead” on this issue is absurd. As I like to say, China is as likely to follow the example of the U.S. on carbon controls as it has with regard to human rights, civil rights, religious freedoms, etc. China and India will act on their economic interests, and they’ve been quite honest about that.
To the extent that the world did implement some kind of internationally harmonized carbon tax regime, as my friend and colleague Ben Zycher at AEI has argued, it would almost certainly result in a tax set too high, and undermined by offsetting competitive behavior (auto industry subsidies, for example) among different regimes.
I’d also point out that such an international tax regime would be highly undemocratic: it would almost certainly be set in international negotiations with some kind of EU/UN input. Your carbon tax in Birmingham could well be set in Brussels. Who do you vote out of office in that situation? Where’s your First Amendment “right to petition your government for redress of grievances” then?
Finally, some “appeasement” conservatives seem to think that agreeing to a carbon tax will let them shed the “climate denier” label that has dogged them in the past. But they’re engaging in wishful thinking. Conservatives will not be able to “take the climate issue off the table” with a carbon tax, because efficient taxation of carbon emissions is not what environmentalists actually want.
For one thing, it allows people choice to continue emitting and simply pay the tax. That’s anathema to environmentalists, who prefer hard emission caps rather than trusting in markets to do what they wish. What environmentalists want is to force energy consumption down to extremely low levels because they want to reduce human impacts on the environment in virtually every way, and they see controlling energy as the best means to that end. They’re probably right about that.
Environmentalists (or mainstream Americans) won’t suddenly vote Republican because there’s a carbon tax. They won’t accept the development of Canada’s oil sands because there is a carbon tax. They won’t suddenly accept Keystone XL because there is a carbon tax.
More likely, the day after enactment of a carbon tax, various groups will put out studies with ever higher “social costs of carbon,” and environmentalists will immediately wave them around, calling for raising the carbon tax, and decoupling it from revenue neutrality to finance more wind and solar boondoggles. And they’ll still want additional regulations to drive emissions down faster. If conservatives resist this, they’ll get the same “denier” routine they get now.
In the rarefied world of economic theory, any number of carbon tax regimes can be constructed that buffer economic harms through rebates. And certainly, they would reduce GHG emissions.
But we don’t live in that world. In the real world of public policy, such ideal taxes are virtually never implemented by the book. And if even it they are, they soon come under attack from people wanting to raise them and gain control of a new, easy to collect, hard to avoid revenue stream.
You can rank carbon regulations, carbon cap-and-trade, and carbon taxes however you wish. But at the end of the day we’re better off with no policy rather than bad policy.