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Oxymoron Alert (Carbon Taxes)

By:
Edward A. Reid Jr.
Posted On:
Mar 14, 2017  at  at 6:19 AM
Category
Climate Change

The Climate Leadership Council has just released a new study “The Conservative Case for Carbon Dividends” and presented it to the Trump Administration for its consideration. The study identifies Four Pillars of a Carbon Dividends Plan:

            1. A GRADUALLY INCREASING CARBON TAX

            2. CARBON DIVIDENDS FOR ALL AMERICANS

            3. BORDER CARBON ADJUSTMENTS

            4. SIGNIFICANT REGULATORY ROLLBACK

Interestingly, the study focuses on the carbon dividend in its title, rather than on the carbon tax. I would argue that a carbon tax is hardly “conservative”. I would also argue that it is not a “market mechanism”, though it would rely on market mechanisms to adapt to the market distortions caused by the tax. The magnitude of the market distortion which would be caused by a carbon tax of ~$40 per ton of CO2 emissions is estimated to be ~$500 per US social security card holder. It would manifest in the economy as an increase in the cost of every good and service; a tax-driven cost push inflation of prices.

The study begins with the premise that global CO2 emissions are undesirable and must be reduced; that is, it assumes that continued CO2 emissions would lead to catastrophic anthropogenic global warming (CAGW). The study also begins with the premise, shared by many economists, that a carbon tax is the most efficient approach to reducing carbon emissions. The study suggests that the recommended carbon tax would be a Pigouvian tax; that is, a tax intended to discourage activities which lead to negative externalities. However, this suggestion ignores any positive externalities associated with CO2 emissions, though positive externalities exist; and, might well currently dominate at present. It is more likely that the recommended tax is simply a “sin” tax, particularly since it is intended to increase over time until the identified “sin” (CO2 emissions) is eliminated.

A carbon tax at a given level does not reliably produce a CO2 emissions reduction of a specific magnitude or percentage. This is particularly true in the short term, as the market response to the tax is affected both by the availability of economic alternative technologies and by the remaining economic useful life of existing equipment in service. The carbon tax does have the flexibility to be increased progressively, as required, to drive the desired emissions reduction. Clearly, the ultimate goal of the tax is to drive CO2 emissions in the US to zero, which would essentially require a transition to an all-electric energy economy, with all electricity provided by nuclear and / or renewables. It is unclear how high the carbon tax would have to be to achieve that objective. It is clear the tax would penalize the current transition from coal to natural gas as the predominant fuel for electric power generation, which has been largely responsible for the reductions in US CO2 emissions over the past several years. It might also constrain that transition in the short term, by discouraging investment in the additional natural gas pipeline and storage capacity required to supply the growing natural gas generation base.

The carbon dividend is a thinly disguised form of income redistribution, since it would provide a uniform quarterly dividend to all US social security cardholders, regardless of the amount of carbon tax, if any, directly or indirectly paid by that social security cardholder. The carbon dividend would likely be popular, particularly among the ~70% of social security cardholders expected to receive a dividend greater than their tax expense. The carbon tax would be imposed upstream of the consumer and would probably appear to be a price increase imposed by suppliers and service providers, rather than as a flow-through tax. Therefore, many dividend recipients would blame suppliers and service providers for the price increases, though they would thank the federal government for the dividend.

The border carbon adjustments process would be extremely complex and costly. There would likely be massive disagreements over the “carbon content” of manufactured goods and the impacts of any carbon emissions reduction efforts on the part of the government of the country in which the imported goods were manufactured. The numbers of products and the number of countries from which they are imported, combined with technology changes over time, would make this a long term ongoing process.

The “significant regulatory rollback” would fly in the face of the regulatory agencies’ imperative to survive and grow. Certainly the tax would be preferable to the current and growing command and control “rats nest” which is environmental regulation. However, in this instance, neither the regulatory morass nor the tax appears to be necessary, absent near-religious belief in the scenarios produced by unverified climate models.

In my early youth, I believed in Santa Claus, the Easter Bunny and the Tooth Fairy. In my advancing maturity, I find it impossible to believe in a revenue neutral tax. The history of “cap and trade” (cap and tax) legislation in the US strongly suggests that the Congress is incapable of producing such a tax.

 

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