May 9, 2018

Carbon Tax Crippling?

Vance Ginn and Megan Ingram of the Texas Public Policy Foundation argue against carbon taxation, saying that a carbon tax would do crippling harm to the American economy:

Because it’s a tax on energy production by fossil fuels that primarily fuel our livelihood, it’s a tax on virtually everything we do. It would mean people paying more for everything they do, eat, wear, and use. Reducing carbon dioxide to a taxable good means the subjection of nearly every facet of human existence to taxation.

The costs are real — and crippling.

The whole pointand the primary advantageof a carbon tax is its ubiquity. Under a carbon tax, prices of energy and consumer goods go up because the things that people buy and consume are produced and delivered by a system laden with carbon emissions. By taxing carbon emissions, every transaction is incentivised toward lower-carbon options of production, delivery and consumption. People producing and buying stuff can switch to low-carbon options, where it is cost-effective and advantageous. The actors involved in trading X for Y will have a much better idea of what X for (less carbon) Z will be cost-effective and advantageous than will a central planner designing policies to reduce carbon emissions through efficiency standards, regulations, or etc. By its widespread nature, the carbon tax will also influence decisions across a wider range of economic activity than an army of bureaucrats would ever be able to accomplish.

And even then, ubiquity doesn’t imply that a carbon tax would be crippling. That is a question of how one calibrates a carbon tax. Here Ginn and Ingram have doubts:

Just as it’s hard to overstate the harm of one, it’s difficult to understate — indeed, even to know — the benefits. That’s because the calculations of the “social cost” used to justify a carbon tax are so subjective in their attempt to quantify the value of human lives and livelihoods, in order to sum up how climate change might affect them. As economist and MIT Professor Robert Pindyck notes, these calculations “can be used to obtain almost any result one desires.”

Furthermore, these models fail to account for how reliable, affordable energy from traditional sources benefit people — by extending lives, fighting disease, reducing hunger, and alleviating poverty.

I have my own concerns about estimates of the social cost of carbon. But it is worth pointing out, that is an uncharitable invocation of Pindyck, who in the same piece wrote “even though we don’t have a good estimate of the SCC, it would make sense to take the Interagency Working Group’s $21 (or updated $33) number as a rough and politically acceptable starting point and impose a carbon tax (or equivalent policy) of that amount.” That the social cost of carbon is somewhat subjective means it should be determined by Congress, agents of our democracy, rather than bureaucrats.

No one who flips a light switch or starts a car doubts the benefits of reliable and affordable energy, but accounting for them is only half the ledger. Figuring out the remote damages caused by climate change is the other half. Comparing the two is completely reasonable. When economist Richard Tol did the calculation last year, he found that the private benefits of consumption that created CO2 emissions were something like $411 per ton of CO2 emitted, ten times the Obama Administration’s social cost of carbon. That very comparison should allay fears that a carbon tax will halt economic activity. Even if we managed to price carbon at its social cost, the private benefits of emitting CO2 will continue to produce and consume as they shift to low-carbon options on the margin.