The Case Against a Carbon Tax

by | Apr 18, 2019 | Energy

Carbon taxes are nonobjective, they are coercive, and they are impediments to prosperity.

In early 2019 the Congressional Progressive Caucus has sought to shift the Overton window for energy and environmental policy. February’s resolution “recognizing the duty of the Federal Government to create a Green New Deal” communicates a consistent, if nebulous, view: government must dictate our energy choices to us, lest we careen toward environmental disaster. Short on specific mechanisms, the Green New Deal is not so much a concrete policy proposal, but rather a repudiation of capitalism as such. In response, various conservatives, libertarians, Republicans, and others who tend to support a free-market economic system have groped for an answer of their own to the climate change question. While some are proposing subsidizing their pet technologies, others—the more intellectually ambitious—are coalescing around the carbon tax.

Unlike support for the Green New Deal, support for a carbon tax does not necessarily arise from categorical opposition to capitalism, but often arises from a concern that the burning of coal, oil, and natural gas—despite the benefits—in some way jeopardizes our future. With its mimicking of a price system, the carbon tax offers a less flagrant, more sophisticated means of economic intervention than the Green New Deal’s command-and-control approach. Some carbon tax proponents go so far as to claim that a carbon tax is a means of “unleash(ing) the power of our free enterprise system.” This optimism is unfounded. Carbon taxes are nonobjective, they are coercive, and they are impediments to prosperity. As this paper will make clear, the carbon tax lacks merit as a public policy.

This paper comprises six core points against the carbon tax:

Carbon taxes are set arbitrarily.

Carbon taxes are set using non-objective standards. The much-debated “social cost of carbon” is a subjective construct that relies not only upon multi-century climate models, but also upon analyst preferences, most notably the highly contentious choice of a discount rate for public policy.

The climate change mitigation goals of the world’s leading political bodies 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 recommended course would be likely to cause more economic damage than global warming itself, according to mainstream work in climate economics.

A U.S. tax-and-rebate plan would slow economic growth.

Americans in the lowest income quintile use a greater percentage of their income to meet their energy needs than the remainder of Americans, rendering carbon taxes regressive. So-called rebates can attempt to offset this effect, but only at the expense of the economy as a whole. According to most studies—including those coming from carbon tax proponents—carbon taxes slow economic growth unless a large portion of the tax revenue is allocated to corporate tax reductions. Recycling revenue through rebates is particularly harmful to overall economic performance.

Carbon taxes have unexpected, adverse tax effects.

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.

A U.S. carbon tax would be irrelevant.

The U.S. is only responsible for around 15 percent of global carbon dioxide emissions. While populous countries like China, India, and Bangladesh continue to grow their industrial capacities—and, as a result, increase their emissions—U.S. emissions have decreased by more than 10 percent since 2005. The only carbon tax with teeth would be one with global reach, which is a nonstarter.

A U.S. carbon tax that would replace existing regulations and/or taxes is not politically viable.

A carbon tax that would replace regulations and/or corporate income taxes would fail to satisfy the environmental activist class’s appetite for control. The only carbon tax that stands a chance politically would come on top of onerous regulation and taxation.

Read the full report here.

Jordan McGillis serves as the Deputy Director of Policy for the Institute for Energy Research.

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