Research & Commentary: Study Finds Carbon-Dioxide Taxes Would Significantly Depress GDP and Economic Growth

Published November 9, 2018

A study of six potential carbon dioxide taxes conducted by Capital Alpha Partners for the Institute for Energy Research (IER) reveals these taxes would depress GDP, not efficiently raise tax revenue, and not satisfy United States emissions reductions requirements under the Paris Agreement. The purpose of the carbon dioxide tax is to decrease carbon dioxide emissions by levying a tax based on emissions.

“We consider economy-wide carbon taxes that begin at $40 and $49 per ton of CO2 and increase annually as well as carbon taxes that phase in to terminal values of $36, $72, $108, and $144 per ton,” the study notes. “We model a carbon tax that would take effect in 2019 and extend over the 22-year period through 2040. We estimate the amount of carbon emissions reduced by each tax and the amount of net revenue generated for the federal government. We also compare federal revenues from the carbon tax to state and local government revenues from income, general sales, and excise taxes. In our modeling, we estimate the effects of various tax reform, tax swap, and tax-for-regulatory swap strategies.”

The study shows “the maximum static net revenue available for tax reform is only 32 cents on the dollar if taxpayers in the lowest two income quintiles are to be protected from a tax increase. With no set-aside for low-income taxpayers, the amount of net revenue available for tax reform rises to 59 cents on the dollar.” Therefore, a carbon dioxide tax would not be an efficient method to raise revenue for use in any tax reform proposal.

Furthermore, the carbon dioxide tax “would push static costs and revenue losses equivalent to 11% of gross revenues through to the states and local government. Under the scenarios we study, this would amount to between $18.9 and $30.7 billion per year. Dynamic losses to state income and general sales taxes would push these costs higher.”

The study authors estimate that, on the high end, a carbon dioxide tax would reduce carbon dioxide emissions by 563 million tons per year within a decade of enactment. However, this would not get the United States to a point where it was meeting its long-term emissions reductions requirements under the Paris Agreement. [The Trump Administration has announced plans to withdraw the United States from the Paris Agreement in November 2019, the earliest it can legally do so.]

Lastly, the study demonstrates a carbon dioxide tax “would introduce vertical tax competition to federal and state excise taxes on motor fuel and impede state efforts to finance new transportation infrastructure. Currently, the bulk of all motor fuel revenue is raised by the states, and all of it eventually goes to the states for infrastructure spending. A federal carbon tax in the scenarios we study would divert the bulk of motor fuel revenues to the federal government, effectively doubling taxes on motor fuels with no new revenue allotted to the states.”

Besides all the macroeconomic problems a carbon dioxide tax would impose as detailed by the IER study, it should be noted that these types of taxes are inherently regressive and disproportionally harm low-income families. The Congressional Budget Office (CBO) found a $28 per ton carbon 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 damage a federal carbon dioxide tax, or even a state-based tax, would impose on the economy are very significant and should not be ignored. A carbon dioxide tax would make all goods and services more expensive for all Americans, increase costs for businesses, and have a minimal, at best, effect on global carbon dioxide emissions.

The following documents provide more information about carbon dioxide taxes.

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 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 Deeply Flawed Conservative Case for a Carbon Tax
In this paper published by the American Enterprise Institute, Benjamin Zycher says the “conservative” Climate Leadership Council’s (CLC) much-hyped carbon-tax proposal is “naïve” and “virtually all of the … assertions in support of its proposal are incorrect or implausible.” The CLC’s plan is “poor conceptually and deeply unserious,” wrote Zycher.

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 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 tax revenues would be used to reduce government debt and federal taxes.

Ten State Solutions to Emerging Issues
This Heartland Institute booklet explores solutions to the top public policy issues facing the states in 2018 and beyond in the areas of budget and taxes, education, energy and environment, health care, and constitutional reform. The solutions identified are proven reform ideas that have garnered significant support among the states and with legislators.

The Carbon Tax Shell Game
Oren Cass of the Manhattan Institute argues the carbon 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 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 (IAMs) and cost-benefit analysis (CBA).

Less Carbon, Higher Prices: How California’s Climate Policies Affect Lower-Income Residents
This study from Jonathan Lesser of the Manhattan Institute argues California’s clean power regulations, including the state’s renewable power mandate, is a regressive tax that harms impoverished Californians more than any other group. 


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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