Some proponents of federal policies to combat climate change are arguing for a federal carbon tax (or similar type of “carbon price”). Within conservative and libertarian circles, some proponents claim that a revenue-neutral carbon tax “swap” could deliver a double dividend, reducing climate change while shifting some of the nation’s tax burden onto carbon emissions, which supposedly would spur the economy.
This analysis describes several serious problems with those claims. The actual economics of climate change — as summarized in the peer-reviewed literature as well as United Nations (UN) and Obama administration reports — reveal that the case for a U.S. carbon tax is weaker than the carbon tax proponents claim.
Future economic damages from carbon dioxide emissions can only be estimated in conjunction with forecasts of climate change. But recent history shows those forecasts are in flux, with an increasing number of forecasts of less warming appearing in the scientific literature in the last four years. Additionally, we show some rather stark evidence that the family of models used by the UN’s Intergovernmental Panel on Climate Change (IPCC) is experiencing a profound failure that greatly reduces their forecast utility.
If the case for emission cutbacks is weaker than the public has been led to believe, the claim of a double dividend is on even shakier ground. There really is a consensus in this literature, and it is that carbon taxes cause more economic damage than generic taxes do on labor or capital, so that in general even a revenue-neutral carbon tax swap would probably reduce economic growth.
When moving from academic theory to historical experience, we see that carbon taxes have not lived up to the promises of their supporters. In Australia, the carbon tax was quickly removed after the public recoiled against electricity price hikes and a faltering economy. Even in British Columbia (BC), Canada — touted as having the world’s finest example of a carbon tax — the experience has been underwhelming. After an initial (but temporary) drop, the BC carbon tax has not yielded significant reductions in gasoline purchases, and it has arguably reduced the BC economy’s performance relative to the rest of Canada.
Both 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. At the same time, there is mounting evidence in the physical science of climate change to suggest that human emissions of carbon dioxide do not cause as much warming as is assumed in the current suite of official models. Policymakers and the general public must not confuse the confidence of carbon tax proponents with the actual strength of their case.
Robert P. Murphy
is a research assistant professor at Texas Tech University and Senior Economist at the Institute for Energy Research. Patrick J. Michaels
and Paul C. Knappenberger
are the director and assistant director, respectively, of the Cato Institute’s Center for the Study of Science.
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