Let us consider the ever-evolving case for taxing greenhouse gas (GHG) emissions, intentionally and misleadingly called a “carbon tax.”
It originally was designed (ostensibly) to reduce GHG emissions to socially efficient levels; generating revenues, per se, decidedly was not the goal. This rationale implies the tax would be set at the marginal “uninternalized” social cost of GHG emissions.
Then someone had a thought: Why not use those revenues to fund a reduction in other distortionary taxes so as to increase aggregate economic performance? In many economic models, including prominent work from my American Enterprise Institute colleague Aparna Mathur and Adele Morris of Brookings Institution, reducing taxes on capital yields the greatest benefit in terms of improved investment and growth. This rationale implies a very different tax on carbon dioxide emissions per ton, one chosen to optimize a complex mix of higher energy costs, carbon-tax revenues, and reduced capital taxation implemented in pursuit of higher permanent economic growth.
Mathur-Morris Carbon Tax
Unsurprisingly, the rationale for a carbon tax has evolved again. Mathur and Morris now argue the federal government should use the revenues from a carbon tax to fund an increase in the earned income tax credit (EITC) to “directly [help] working families” and “fill the deficit hole.”
Note that in 2009 and 2110, the Democrats—in control of the House of Representatives, with 60 votes in the Senate, and in control of the presidency—failed to pass climate change legislation, suggesting a carbon tax is a difficult proposition politically.
In any event, this new policy goal obviously implies yet a different carbon tax rate, one that would yield sufficient revenue to satisfy the EITC and deficit objectives. Mathur and Morris assume implicitly there would not be a stampede of interests demanding a share of the loot; only working families and deficit reduction would be the funding goals. Seriously?
A Tax Is a Tax
Because Mathur and Morris do not pretend their per-ton carbon tax has anything to do with the purported marginal social cost of GHG emissions, it is not quite clear why they need a “carbon” tax at all. Why not a tax on okra, or fat-free ice cream, or argyle socks, or any of the other myriad monstrosities confronting modern mankind? Actually, the reason is clear: A carbon tax is where the big money (potential tax revenue) is.
In the rigorous analytic world of Mathur-Morris public finance, efficient taxation is not to be driven by considerations of economic distortions or allocating the costs of government outlays in accordance with varying demands for public spending. Instead, an efficient tax is one that fills a “deficit hole” that seems to exist independent of the spending decisions made, or not made, by Congress.
Facing Political Reality
Mathur and Morris might respond that the real key to filling the deficit hole—entitlement reform—is unavailable politically, in particular with a President, Donald Trump, who campaigned against it and whose political coalition includes large numbers of voters who oppose it. So more revenue, lots of it, is the only game in town.
Fair enough. But if Mathur and Morris are going to use political reality as a constraint driving their policy proposal, we must ask what that reality says about their use of the carbon tax revenues to expand the EITC and to replace the revenues lost to the recent reduction in capital taxation.
They claim “about 11 to 19 percent of the carbon revenues would keep the poorest 20 to 40 percent of low-income families whole on average, . . . [leaving] at least 80 percent of revenues to cover the reduction in other taxes.” What about the other 60 to 80 percent of low-income families? Will they not also demand to be made whole?
In addition, it is unlikely middle-income families, the largest family voting bloc, will be happy to bear ever-higher energy costs while most or all of the revenues are used to subsidize others. Will their representatives in Congress not respond to their complaints? Would the recent cut in capital taxation have passed Congress had it been tied to an increase in individual taxes, whether on incomes or “carbon”? The question answers itself.
Spending Increase Likely
More generally, the implicit Mathur-Morris assumption that a massive new tax would not create a life-or-death tug-of-war over new spending simply is not credible. Any carbon tax emerging from the congressional bargaining process would almost certainly include an explicit quid pro quo in the form of expanded spending for groups harmed on net by the carbon tax and/or for groups viewed politically as the marginal (or median “swing”) voters.
Mathur and Morris seem actually to believe a majority coalition in Congress enacting a carbon tax will be willing to take the heat for higher energy costs without using the revenues to create some sort of offsetting political benefit. Why, then, have both Democratic and Republican Congresses refused to enact any policies constraining GHG emissions?
Rising Gas Taxes
Mathur and Morris’s proposed carbon tax would begin at $25 per metric ton of carbon dioxide (equivalent) and rise “at 5 percent per year over inflation,” apparently permanently.
So the tax would initially add about 22 cents per gallon to the retail price of gasoline. Average household gasoline consumption is about 1,120 gallons per year. If we assume a national average gasoline price of $2.50 per gallon and reasonable expectations concerning peoples’ responses to higher fuel prices, households would reduce their consumption of gasoline to about 1,090 gallons. Accordingly, the carbon tax paid by the average household would be about $240 per year. This underestimates the economic cost of the gasoline component of the carbon tax to households because the gasoline no longer consumed is an economic loss. Even so, the $240 is approximately a quarter of the average household tax cut just enacted.
The tax, in inflation-adjusted terms, would be 28 cents per gallon after five years, 36 cents after 10 years, and 58 cents after 20 years. These figures shunt aside the increases in the prices of a vast array of goods and services resulting from the Mathur-Morris carbon tax—the tax means automatically the private sector shrinks while the government sector grows—but even the narrow gasoline component after 20 years would amount to more than half of the recent income tax cut for households annually.
Negligible Temperature Effect
Let us turn now to the not-very-rigorous analysis of climate and environment policy used as a partial justification for the Mathur-Morris proposal.
Their claim the tax would “[reduce] U.S. carbon dioxide emissions . . . over 50 percent by 2040 relative to a business-as-usual emissions projection” sounds impressive if one assumes increasing GHG emissions are a serious problem, a proposition vastly less obvious than commonly asserted. But Mathur and Morris seem curiously uninterested in the future temperature effect of the associated reduction in domestic GHG emissions despite the fact preventing temperature increases is supposed to be the central goal of climate policy.
Under a range of assumptions concerning the Earth’s sensitivity to greenhouse gas concentrations, including the often cited assumption if GHG concentrations double from preindustrial levels the Earth will warm by approximately 4.5 degrees Celsius (which actually exaggerates the future temperature effect of GHG concentrations), application of a climate model used by the U.S. Environmental Protection Agency (EPA) to the Mathur-Morris carbon tax proposal indicates it would prevent a 0.07 degrees Celsius average rise in temperatures in 2100.
How much is this trivial temperature effect—effectively zero—worth? The political cost of then-President Barack Obama’s climate action plan, advertised as reducing U.S. GHG emissions by 17 percent, was perceived to be sufficiently high it was not even considered by Democrats when they controlled Congress during 2009 and 2010. What does that tell us about the politics of a 50 percent reduction?
What About Paris?
The ice beneath the carbon taxers’ feet is no thicker when they assert their proposed tax “would be large enough to deliver on the United States commitment to the Paris climate agreement without a single additional regulatory measure.”
Ask not about the utter silliness of the Paris climate agreement; ask instead the central question any economist should address, again the one ignored by Mathur and Morris: What are the respective temperature effects in 2100? Assuming the entire Paris agreement is implemented immediately and every party adheres to it strictly, it would prevent approximately 0.17 degrees Celsius of temperature rise in 2100. Emission reductions in the United States would prevent 0.015 degrees of that total. Regardless of what one believes about the underlying climate science, no one can seriously argue such a trivial impact would have any measurable effect on cyclones, droughts, and all the rest.
Moreover, even in the narrowest context of a carbon tax imposed to prevent climate damage, the climate evidence is vastly weaker than the popular discussion might lead one to assume. There is virtually no evidence increasing GHG concentrations are yielding serious adverse effects, and the reverse is more likely to be true, at least in the immediate term in terms of agricultural productivity and related parameters. Even the Intergovernmental Panel on Climate Change in its Fifth Assessment Report is deeply doubtful toward the various horror stories—such as the collapse of the Gulf Stream—popularized as looming effects of increasing atmospheric concentrations of GHG.
Pollutants Already Regulated
With respect to the ancillary reduction in “harmful air pollutants like sulfur dioxide, mercury, particulate matter, and nitrogen oxides” touted by Mathur and Morris as benefits of their proposed carbon tax: They are well-trained economists and clearly understand such reductions are not costless. Accordingly, emissions or levels of pollutants (or ambient air quality) can be too low or too high from the perspective of benefits and costs.
Because EPA, upon determining a given effluent endangers the public health and safety, is required to promulgate primary and secondary national ambient standards that “protect the public health” with “an adequate margin of safety,” we have such standards and emissions limits for all the pollutants mentioned by Mathur and Morris and for many others.
Are Mathur and Morris arguing current standards and regulations limiting air pollutants fail to satisfy the requirements of the law? Are they arguing “protect[ing] the public health” with “an adequate margin of safety” is too lax a standard? Are they assuming that any reduction in effluents is efficient by definition? It is unclear how much thought Mathur and Morris have given this issue.
The Mathur-Morris carbon tax supposedly solves a number of problems at once. That alone is a sound reason to be skeptical toward it. The carbon tax instead would consume vast amounts of other people’s money with no environmental benefits whatever and with a notional reduction in budget deficits that is almost certain not to result.
Benjamin Zycher, Ph.D. ([email protected]) is a resident scholar at the American Enterprise Institute. This article was previously published at aei.org, Reprinted with permission.
