When It Comes to a Carbon Tax, There’s No Such Thing as a Free Lunch

Published May 8, 2017

New York Times op-ed writer and former editor Tina Rosenberg cites the United Kingdom’s allegedly positive experience imposing a carbon tax of more than $20 per ton of CO2—coupled with costly energy efficiency regulations—as proof that such policies can save consumers a bundle of money.

Rosenberg says that following the enactment of a substantial hike to the United Kingdom’s carbon tax in 2013—a tax that has all but shut down coal-based power generation—British “consumers have switched to more efficient appliances, and the combination [of huge taxation and heavy regulation] has allowed their electricity bills to drop.”

Rosenberg embraces a plan offered by a group of prominent Republican politicians and endorsed by many of America’s business leaders that would impose a tax of $40 per ton of carbon dioxide, which they say would allow a family of four to receive an annual government “dividend” check of $5,000.

Would American families really be made better off by such initiatives? Of course not. As the late American economist Milton Friedman said, “There’s no such thing as a free lunch.” Somebody has to foot the bill for costly taxes and regulations proposed by carbon-tax supporters, and that “somebody” is the nation’s consumers, families, and all the workers who lose their jobs as a result of this great “bargain.”

Consider what happened to Britain’s families and workers following the passage of its Climate Change Act in 2008. It, like the proposed carbon-tax scheme some Americans want today, included substantial subsidies to wind and solar-power businesses. Since 2007, the year before the British legislation was enacted, real, inflation-adjusted yearly electricity bills in the United Kingdom have risen by more than 20 percent—from $554 to $659 per household, calculated using today’s exchange rate.

Contrary to Rosenberg’s assertion, these bills have increased, not fallen, since 2012—despite declining prices for natural gas and coal-fired electricity generation and much milder winters. The United Kingdom’s winter in 2015–16 was 7.4 degrees F above its 1981–2010 average, while the winter of 2012–13 was 0.7 degrees F below that average. Average electricity demand during the 2015–16 winter season was more than twice that of the previous summer season.

Isolation/identification of the effects of taxes and regulations must hold constant the effects of warming weather and falling fossil-fuel prices. A study by Britain’s Global Warming Policy Foundation found the United Kingdom’s emissions tax had increased U.K. electricity bills by more than $400 per household in 2014, a figure that will rise to more than $700 in 2020 and $1,100 in 2030, assuming current exchange rates. And these estimates are extremely conservative, because they do not take into account the impact of fossil-fuel taxes and regulations on natural gas bills or, most importantly, “the two thirds of climate policy costs that raise the cost of energy for industry” and whose costs those businesses must pass on to consumers in order to remain competitive.

They also fail to capture the costs of subsidies to windmill and solar-power companies imposed on the United Kingdom’s consumers and workers, which now account for nearly half of Britain’s electric-power generation. The U.K. National Audit Office, the equivalent of the United States’ Government Accountability Office, estimates these subsidies will amount to $139 of what it forecasts to be a $1,249 “average annual household bill by 2020.”

Rosenberg argues these costs are reduced by fuel savings from the purchase and use of more energy-efficient appliances. It’s true savings have occurred, but any such savings have come nowhere near the increased costs of electric power combined with higher-priced appliances that many in the country cannot afford and that are often less reliable and come with higher repair bills.

This is not to mention the other two-thirds of the U.K. climate act’s cost iceberg. And all this for what? A negligible impact on global warming—which, in any event, would lower utility bills and otherwise make families and workers better off.

Friedman was right; there really is no such thing as a free lunch. Taxing and regulating the lowest-cost sources of power out of existence has imposed enormous costs on Britain’s families. Pretending otherwise will not make it so.

[Originally Published at RealClearEnergy]