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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.

2. Regressivity

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?

A Tiger-by-the-Tail

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.

Conclusion

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.

8 comments

1 gofer { 08.09.13 at 2:23 am }

Carbon tax is the wrong wording. It should be called “Air tax” since that defines it more clearly. I wager most people don’t know it’s a gas that is the subject and not black soot which is why “carbon” is used instead of “carbon dioxide” in order to convey something dirty. I wonder how people would answer the question…..”Would you support a tax on air?” I bet you that most all of them would act as if you were crazy. Why hasn’t this question been asked? Sometimes we overestimate the level of understanding in the public and also ask people if they know what CO2 is and ask them what causes global warming. The answer will be “pollution” but beyond that ignorance will prevail.

2 Eddie Devere { 08.09.13 at 8:39 am }

“That which you fear the most, might just meet you half way.”
–PJ, Crazy Mary

This article is effectively a call for a civil war. I hope you realize the slippery slope of the logic in this article. You are basically calling for a civil war with environmental groups by defending the right to emit CO2 into the atmosphere without any consequences.
Using ‘strawman’ arguments about environmentalists who want to hijack the laws for enacting ‘social policy’ is not an excuse for supporting a policy of “Do Nothing.”
Your time could be much better spent if you were brainstorming ideas that could win bi-partisan support rather than effectively calling for a civil war. There are other options for reducing CO2 emissions than just the ones you listed in the article. The problem of CO2 emissions is not going to go away magically. Please stop waiting your time arguing for “Do Nothing” and start thinking about policies that can work fairly efficiently. And don’t let the perfect be the enemy of the good.

3 rbradley { 08.09.13 at 8:57 am }

Eddie:
We won the carbon/BTU tax war in the early 1990s. We won against cap-and-trade several years ago. We are winning the carbon tax today–thanks to Ken Green and others who have informed the debate very well.

Giving the government a new qualitative tax–the carbon tax–is like having a wine tasting at an AA meeting. I’d drop your romantic view of government–and question climate alarmism too given the temperature record of the last 10-15 years in light of climate models (see here).

4 John W. Garrett { 08.09.13 at 3:23 pm }

This would be a lot easier if it was possible to distinguish between the genuinely concerned and the watermelons who have hijacked (and bent) the science as a means to achieve their ends. Unfortunately, the “useful idiots” have entered into a bargain with the devils.

5 Kenneth Green { 08.09.13 at 7:32 pm }

Eddie – You’re taking one speech that I gave as summarizing everything I think about climate change – that’s rather silly, since I’ve been writing about climate change since 1996 or so. I’m not an advocate of “doing nothing,” nor do I “deny” climate change as a physical reality. I think it’s been wildly exaggerated, but I think it’s real. Further, I’ve written that I think we should make significant efforts to build societies that are resilient to climate change, whether man-made or natural. Here’s a recent example, but I’ve been making this same argument since the late 1990s: http://www.aei.org/article/energy-and-the-environment/climate-change-the-resilience-option/

6 Weekly Climate and Energy News Roundup | Watts Up With That? { 08.11.13 at 4:44 pm }
7 Frank { 08.13.13 at 2:07 am }

Ken: You are correct that environmentalists and other liberals want to add a carbon-tax to regulation and cap-and-trade. However, that doesn’t mean those who recognize the need for emissions reductions and advantages of a carbon tax shouldn’t be willing to support a carbon tax if the same legislation removes regulations and omits cap-and-trade. Cap-and-trade requires purchase of emission permits (a form of taxation) and regulation imposes higher costs (equivalent to taxation). The environmentalist/liberal approach could be branded double or triple taxation, even before a carbon tax was passed.

Your objection #1 to changing rules could be addressed phasing out regulations as a carbon tax was phased in.

Regressivity (0bjection #2) could be addressed by refunding the proceeds of a carbon tax equally to all citizens with a SSN. Everyone has an equal right to use our atmosphere’s limited capability to safely absorb CO2 emissions, so everyone deserves an equal share of whatever tax is imposed to reduce emissions.

Geographic discrimination (objection #3) is caused by geographic overuse of our atmosphere’s limited capability to safely absorb CO2. It’s sound economics for the largest emitters to pay the most taxes (but they might be imposed more slowly in heavily impacted regions.)

Contamination by regulation or emissions permits (objection #4) isn’t inevitable. If the estimated social cost of carbon rises (or falls), this problem must be addressed by a rise (or fall) in the carbon tax, especially if the net proceeds are rebated equally to each citizen, instead of being used to fund additional spending. McKitrick has proposed a carbon tax that rises with global temperature (and possibly sea level).

Unilateralism (objective #5) is the real show-stopper, but it isn’t a good excuse for doing nothing. Perhaps the level of taxation could rise automatically as other nations achieve emissions reductions or carbon taxes. As long as China and India’s emissions are growing and the rest of the world is back-sliding, a US carbon tax could remain negligible and still possibly frustrate the enviros efforts.

You write: “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.” That works only until the Republicans bomb at the polls. The 2008 election brought us Obamacare (which appears to be irreversible), possibly because the Republicans had no policy alternatives. The next Republican mistake could bring us Waxman-Markey, which actually made it through the House in 2009.

8 rbradley { 08.13.13 at 7:05 am }

Frank:

First, it is time to at least consider that CO2 is a positive and not negative externality (see today’s post at MR). We have plenty of evidence now, and the temp effects of rising atmospheric GHG levels is at or below model minimums.

Second, one can be for something in theory but not in practice because there is inherent government failure, not only ‘market failure.’ And giving the gov’t a new lever on the economy is like having a wine tasting at an AA meeting…..

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