Research & Commentary: Brief Details the Many Faults of a Carbon Dioxide Tax

Published May 2, 2019

A new policy paper from the Institute for Energy Research details the ways in which a tax on carbon dioxide emissions “lacks merit as a public policy.” The purpose of the carbon tax is to decrease carbon dioxide emissions by levying a tax based on the amount of emissions produced.

The Case Against a Carbon Tax breaks down its argument into six separate parts. The first is the arbitrariness of the prices set for a tax. These are subjective prices that are based on the “social cost of carbon,” i.e. the marginal cost of carbon dioxide emissions on society. However, what this “social cost” is, whether there is a social cost at all, or whether there is instead a social benefit to carbon dioxide emissions are all questions that are still being thoroughly debated.

Second, the brief notes that the climate change mitigation goals of the U.N. International Panel on Climate Change (IPCC) are “at odds with the climate economics literature.”

“The 2018 IPCC recommendation for governments to implement policies compatible with limiting global warming to 1.5°C above pre-industrial levels ignores the economic harm such policies would impose in the near term,” the brief states. “The recommended course would be likely to cause more economic damage than global warming itself, according to mainstream work in climate economics.”

Another problem with carbon dioxide taxes is they are highly regressive and slow economic growth. The Congressional Budget Office (CBO) found a $28 per ton carbon dioxide tax would result in energy costs being 250 percent higher for the poorest one-fifth of households than the richest one-fifth of households. CBO reports the reason for cost discrepancy is “a carbon tax would increase the prices of fossil fuels in direct proportion to their carbon content. Higher fuel prices, in turn, would raise production costs and ultimately drive up prices for goods and services throughout the economy … Low-income households spend a larger share of their income on goods and services whose prices would increase the most, such as electricity and transportation.”

The brief also notes, “Carbon taxes initiate vertical tax competition between federal, state, and local governments. Furthermore, as excise taxes, carbon taxes can have a greater distortionary effect on economic activity than do taxes on income, undermining the claims of carbon tax advocates that a tax swap would increase efficiency.”

One other substantial problem with a carbon dioxide tax outlined by the brief is that it would produce an insignificant environmental benefit, as the United States only produces roughly 15 percent of the world’s total carbon dioxide emissions. As Oren Cass, senior fellow at the Manhattan Institute, noted in National Affairs: “The effectiveness of a carbon tax as a matter of environmental policy [depends] not only on how it would directly alter the trajectory of [local] emissions but also on its ability to affect global emissions by driving globally applicable technological innovation or by influencing the behavior of foreign governments. On each of these dimensions, the carbon tax fails.”

Lastly, the carbon dioxide tax is politically unpalatable. A tax of this kind cannot pass in even the bluest of blue states. For example, Washington State has had two ballot initiatives on carbon dioxide taxes in the past five years, and each time a very large majority of voters rejected the tax.

As this brief makes clear, carbon dioxide taxes would make everything more expensive for working families in the United States, drive up costs for businesses, and have an insignificant effect on global carbon dioxide emissions. There is no justification for a federal carbon dioxide tax, and even less so for those proposed at the state level.

The Case Against a Carbon Tax
This paper from Jordan MacGillis of the Institute for Energy Research argues carbon dioxide taxes are unjustified and unwise. He contends these taxes have demonstrated themselves to be costly and incapable of constraining governments from implementing and maintaining other burdensome regulations and taxes. He also notes the United States is better off without one.

The Carbon Tax: Analysis of Six Potential Scenarios
This study commissioned by the Institute for Energy Research and conducted by Capital Alpha Partners uses standard scoring conventions to evaluate and model the economic impacts of carbon taxes set at a variety of dollar figures, with different phase-in durations, and with an array of revenue-recycling strategies. It finds a carbon dioxide tax will not be pro-growth, is not an efficient revenue raiser for tax reform, depresses GDP and introduces with long-term fiscal challenges playing particular stress on the states, and is inconsistent with meeting the long-term Paris Agreement emissions reduction goals.

The Carbon Tax Shell Game
Oren Cass of the Manhattan Institute argues the carbon dioxide tax is a shell game. The range of designs, prices, rationales, and claimed benefits varies so widely that assessing the validity of most proposals is nearly impossible to accomplish. In this article for National Affairs, Cass says the effect of carbon dioxide taxes on emissions has proven to be insubstantial, a fact he says is ignored by the tax’s proponents when promoting its purported benefits.

The Case Against a U.S. Carbon Tax
In this paper from the Cato Institute, Robert P. Murphy, Patrick J. Michaels, and Paul C. Knappenberger examine carbon dioxide tax programs in place in Australia and British Columbia and consider whether similar programs would be successful in the United States. They conclude, “In theory and in practice, economic analysis shows that the case for a U.S. carbon tax is weaker than its most vocal supporters have led the public to believe.” 

Economic Outcomes of a U.S. Carbon Tax–us-carbon-tax
This report from the National Association of Manufacturers evaluates the potential impacts carbon dioxide taxes whose revenues would be devoted to a combination of debt and tax rate reduction would have on the U.S. economy. The results consider the varied economic effects of fossil-fuel cost increases caused by carbon taxes, as well as the positive economic effects of the assumption that carbon dioxide tax revenues would be used to reduce government debt and federal taxes.

Legislating Energy Poverty: A Case Study of How California’s and New York’s Climate Change Policies Are Increasing Energy Costs and Hurting the Economy
This analysis from Wayne Winegarden of the Pacific Research Institute shows the big government approach to fighting climate change taken by California and New York hits working class and minority communities the hardest. The paper reviews the impact of global warming policies adopted in California and New York, such as unrealistic renewable energy goals, strict low carbon fuel standards, and costly subsidies for buying higher-priced electric cars and installing solar panels. The report’s authors found that collectively these expensive and burdensome policies are dramatically increasing the energy burdens of their respective state residents.

The U.S. Leads the World in Clean Air: The Case for Environmental Optimism
This paper from the Texas Public Policy Foundation examines how the United States achieved robust economic growth while dramatically reducing emissions of air pollutants. The paper states that these achievements should be celebrated as a public policy success story, but instead the prevailing narrative among political and environmental leaders is one of environmental decline that can only be reversed with a more stringent regulatory approach. The paper urges for the data to be considered and applied to the narrative.

The Social Benefits of Fossil Fuels
This Heartland Policy Brief by Joseph Bast and Peter Ferrara documents the many benefits from the historic and still ongoing use of fossil fuels. Fossil fuels are lifting billions of people out of poverty, reducing all the negative effects of poverty on human health, and vastly improving human well-being and safety by powering labor-saving and life-protecting technologies, such as air conditioning, modern medicine, and cars and trucks. They are dramatically increasing the quantity of food humans produce and improving the reliability of the food supply, directly benefiting human health. Further, fossil fuel emissions are possibly contributing to a “Greening of the Earth,” benefiting all the plants and wildlife on the planet.

Climate Change Reconsidered II: Fossil Fuels – Summary for Policymakers—summary-for-policymakers
In this fifth volume of the Climate Change Reconsidered series, 117 scientists, economists, and other experts assess the costs and benefits of the use of fossil fuels by reviewing scientific and economic literature on organic chemistry, climate science, public health, economic history, human security, and theoretical studies based on integrated assessment models and cost-benefit analysis.



Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Environment & Climate News, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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