A Free-Market Energy Blog

Stones Into Bread: False Claims of CO2 Taxation

By -- October 6, 2014

“If the government is going to force businesses and households to do things that are uneconomical, this will be costly. It will make the country as a whole poorer than it otherwise would have been, at least measured in conventional terms such as GDP, real income, job growth, etc…. We should not kid ourselves into thinking the here-and-now costs will be negligible.”

Lately the proponents of “saving the planet” from climate change (yes, them) are proposing that the rest of us have our cake and eat it too. In an editorial for the Denver Business Journal, Chris Hoffman cited a REMI study claiming that a “fee and dividend” on carbon dioxide emissions will not only reduce climate change, but will also (they assure us) somehow create jobs and make everyone richer to boot.

Climate-change policy does not turn stones into bread. Hoffman’s claims violate both common sense and the peer-reviewed economics literature. Adding restrictions on businesses and households takes away options to make us poorer. If proponents want to say this impoverishment was necessary to reverse manmade climate change, that would be coherent. There are tradeoffs.

Uneconomical = Extra Costs

The reason businesses and households rely so heavily on conventional energy sources—such as coal and natural gas for electricity, and petroleum for transportation—is that these are the most economical sources. Wind and solar electricity generation can serve niche markets, but they currently require coal- or natural gas-fired backup generation in case the wind isn’t blowing or it’s a cloudy day or nighttime.

For transportation, yes we can imagine a country filled with electric vehicles, but right now we don’t have the infrastructure—such as recharging stations covering the interstates—for that to be feasible.

Perhaps fifty or a hundred years from now things will look much different, and natural market forces at that time will lead entrepreneurs and households to rely far more heavily on renewable energy. But right now, these technologies do not pass the market test, and that’s precisely why the government would have to force their early adoption through a carbon tax or other mandates.

Now if the government is going to force businesses and households to do things that are uneconomical, this will be costly. It will make the country as a whole poorer than it otherwise would have been, at least measured in conventional terms such as GDP, real income, job growth, etc. To be sure, it’s entirely possible that the benefits measured in reduced climate damage at some future point in time more than compensate for these economic costs. But we should not kid ourselves into thinking the here-and-now costs will be negligible.

Mainstream Cost Estimates

My claims are uncontroversial. For example, the most recent Intergovernmental Panel on Climate Change (IPCC) report admitted that the climate goal of limiting the planet’s warming to 2 degrees Celsius would reduce global consumption in the year 2100 by 4.8 percent (relative to what it otherwise would have been). [1] Even Paul Krugman, in a column endorsing strong government action against emissions, admitted back in 2009, “Yes, limiting emissions would have its costs. As a card-carrying economist, I cringe when ‘green economy’ enthusiasts insist that protecting the environment would be all gain, no pain.” [2]

With the above context, we should be extremely skeptical when supporters of a “fee and dividend” carbon tax scheme tell us—as Chris Hoffman did in his recent opinion piece—that such a plan would shower economic prosperity on Colorado to the tune of $500 annually in real income per person, and an employment increase of more than 200,000 jobs.

Forget climate change for a moment and think about what Hoffman is claiming: If the government collects a bunch of money from people, then divides it into equal segments and mails it back, people on average end up richer. That can’t possibly be right. That’s like claiming a new state lotto would cause the average Colorado resident to have more money in his or her checking account.

To be clear, this is outside of the debate over the physical science of climate change; I am not “denying” facts about what natural scientists say concerning carbon dioxide emissions and climate change.

Rather, my points are economic ones: I am stating the basic facts—backed up by the “consensus” literature—that government policies to restrict emissions will have significant economic costs. If proponents of a fee-and-dividend scheme want to argue that the environmental benefits outweigh the economic costs, then we can have that discussion.

Conclusion

Chris Hoffman editorializes that there would be no economic downside to his plan, and better yet, it would create prosperity as a side effect of saving the planet.

This is simply not true. If citizen-voters want to reduce economic growth and job creation in the quest of reducing emissions, that is one thing. But to pretend that there are not tradeoffs is disingenuous.

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[1] See the top row (gray columns) of the table on page 16 here: http://report.mitigation2014.org/spm/ipcc_wg3_ar5_summary-for-policymakers_approved.pdf. Strictly speaking the table shows the 4.8 percent consumption loss for a particular atmospheric concentration target, but elsewhere the IPCC report says that achieving 2C of warming would require such a target.

[2] Paul Krugman, “An Affordable Salvation,” New York Times, April 30, 2009, available at: http://www.nytimes.com/2009/05/01/opinion/01krugman.html.

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This post is a revised version of a count-counterpoint I had in the Denver Business Journal (pay wall) with Mr. Chris Hoffman.