A Skeptical Look at the Carbon Tax

The year 2013 will see a major political debate over proposals for a carbon tax—a tax on emissions of greenhouse gases (GHGs), particularly carbon dioxide (CO2). The justifications for the proposals include: (1) a desire to reduce emissions to prevent a rise in global temperatures; and (2) the hope that a carbon tax could substitute for other taxes and improve economic efficiency, while raising enormous sums for the government.

The carbon tax finds theoretical justification in economic theory, but it is a deeply flawed idea.

Five sets of consideration militate against it—the five circles of Carbon Tax Hell:

1) A U.S. carbon tax will have only minuscule effect, if any, on global temperatures.

2) Economic projections that purport to show that the costs are manageable fail to identify specific and feasible energy technologies that will be deployed in place of carbon-based sources. They assume that technological and economic breakthroughs will occur.

3) While economic theory provides support for a carbon tax (it is called a Pigovian Tax), the theory is more complex than usually represented. Current proposals do not account for benefits that would accrue from higher atmospheric CO2 levels. Nor do they reflect all the positive benefits of cheap energy that are not captured by the energy producers.

4) Predictions of climate change and assessments of the costs of carbon tax both rely on mathematical models. Modeling is an inexact art, and both sets of models have deep flaws. They do not provide an adequate basis for action.

5) A carbon tax will face many practical problems. It is supported by a “Bootleggers-and-Baptists” coalition of environmentalists, corporate profiteers, and government dependents which will shape its provisions in ways that undercut its beneficial effects and accentuate its harmful side. A carbon tax will reduce national GDP and inhibit job creation, will be regressive in its effects, and will damage energy-intensive industries and pressure them to leave the U.S.

Judging by past experiences, the carbon tax will not substitute for other taxes or improve their efficiency, nor will it be implemented without political favoritism. It will not substitute for other regulations. On the international side, it will force the creation of complicated regime of taxes and subsidies to reflect the actions or inactions of other nations.

Even strong proponents of a carbon tax admit that a system which does not include China will be unworkable, but official Chinese statements show that China is unlikely to agree to any carbon tax that significantly increases the cost of energy and inhibits its economic development.

Political discussion would be improved if the term “tax” were reserved for levies designed to meet the government’s need for revenue, while imposing as little damage as possible on the economy. A carbon tax is not a tax in this sense; it is a tool of social engineering, imposed to meet the goals of central planners. If this tool fails to meet the planners’ goal of a specific target for reducing CO2 emissions, then other means will be deployed. Viewed from this perspective, the carbon tax enterprise suffers from the fatal conceit inherent in any belief that central planners can guide an economy.

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