03.7.2017

The Deeply Flawed Conservative Case for a Carbon Tax

Executive Summary The Climate Leadership Council (CLC) last month proposed a gradually increasing carbon tax on greenhouse gas emissions, with the revenues to be distributed as “dividends” to all Americans. It proposes also border adjustment rebates and fees for exports and imports to and from foreign markets without equivalent tax policies, and a significant reduction in the existing regulations limiting greenhouse gas emissions, but with an overall reduction in emissions below those incorporated in the current regulatory regime. Virtually all of the CLC assertions in support of its proposal are incorrect or implausible. The CLC provides no evidence that climate risks are “too big” and assumes that the proposed tax would provide “insurance” without examining the future climate effects of its proposal. The argument that an emissions tax is a more efficient method of reducing emissions relative to regulations is not correct. The dividend proposal is naive in that it ignores the coalition problem in Congress and the relative influence of concentrated and unconcentrated pressure groups. The border tax adjustment would be hugely complex given the international supply-chain system, leading to an increase in the attendant bureaucracy even if the regulatory bureaucracy is reduced in size. Contrary to its assertions, the CLC proposal would increase the government allocation of resources and thus the size of government. And the premise that the proposal will strengthen the economy by engendering new investment in unconventional energy is a classic manifestation of the broken-windows fallacy: Because the proposal would increase energy costs with no environmental benefits, the economy in the aggregate would be smaller. The CLC misrepresents the findings of a Treasury Department study; after accounting for employment and wage effects, the bottom 70 percent of the income distribution are unlikely to find themselves better off. The gradually rising tax eventually would yield declining revenue, and there is no easy option for preserving the dividend payments. And the CLC refutes its own claim of policy “predictability” by proposing that after five years a blue-ribbon panel could recommend an increase in the tax rate. The CLC proposal is deeply unserious. Read the PDF. Introduction Poor analysis is pervasive in Beltway policy debates, the latest manifestation of which is yet another “conservative” plea for a tax on “carbon,” that is, emissions of greenhouse gases (GHG), among which carbon dioxide is by far the most important component.1 Carbon and carbon dioxide are not the same thing, as discussed in the Appendix. For now let us address the arguments in favor of such a tax as promoted in early February by the Climate Leadership Council (CLC), a prominent group of self-described “conservative” academics, former policymakers, and think-tank types.2 They propose (1) a “carbon” tax starting at $40 per ton and rising in real terms thereafter, combined with (2) a “dividend” policy returning all the revenues quarterly to “the American people” equally in lump-sum fashion, with (3) a border “carbon adjustment” for exports to and imports from nations not imposing a similar policy, and (4) a significant reduction, but not complete elimi-nation, of the GHG policies implemented by the Obama administration, whether by regulation or by executive order.3 The justifications and details of the proposal can be summarized as follows:
  • The “evidence of climate change is growing too strong to ignore,” and “the risks associated with future warming are too big and should be hedged.”
  • The rising carbon tax would provide “an insurance policy.”
  • “Economists are nearly unanimous in their belief that a carbon tax is the most efficient . . . way to reduce carbon emissions.”
  • “All the proceeds from this carbon tax would be returned to the American people on an equal . . . basis” as “dividends.”
  • The Clean Power Plan would be repealed, and “much” of the other Obama climate regulations would be phased out, with a tax-induced increase in emissions reductions below that attendant upon the Obama regulatory regime, so as to “sustain a bipartisan consensus.”
  • In addition, a “border carbon adjustment” would engender a level playing field between US exports and imports: rebates to exports and fees imposed on imports respectively to and from countries failing to impose such a tax, with the fees increasing the dividends paid to “the American people.”
  • The combination of the dividend and regulatory reduction policies would shrink “the overall size of government.”
  • A carbon tax would encourage technological innovation and a “large-scale substitution of existing energy and transportation infrastructures, thereby stimulating new investment” and providing “predictability” for the private sector.
  • “The bottom 70% of Americans would come out ahead under such a program.”
Let us now address each of these arguments in turn, except that the evidence and risks of climate change are examined in the Appendix. Read the full report. Notes 1 See US Environmental Protection Agency, “Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990–2015,” draft, February 15, 2017, ES-3, Table ES-1, https://www.epa.gov/sites/production/files/2017-02/documents/2017_complete_ report.pdf. Note that water vapor and clouds are responsible for 65–85 percent of the radiative (warming) properties of the troposphere. See K. P. Shine et al., “Radiative Forcing of Climate,” in Climate Change: The IPCC Scientific Assessment, ed. J. T. Houghton, G. J. Jenkins, and J. J. Ephraums (Cambridge, UK: Cambridge University Press, 1990), 41–68, https://www.ipcc.ch/ipccreports/far/wg_I/ipcc_far_wg_I_chapter_02.pdf. 2 See Climate Leadership Council, https://www.clcouncil.org/. 3 See James A. Baker III et. al., “The Conservative Case for Carbon Dividends,” Climate Leadership Council, February 2017, https://www.clcouncil.org/wp-content/uploads/2017/02/TheConservativeCasefor CarbonDividends.pdf. See also David Bailey and David Bookbinder, “A Winning Trade,” Climate Leadership Council, February 2017, https://www. clcouncil.org/wp-content/uploads/2017/02/A_Winning_Trade.pdf; and Ted Halstead, “Unlocking the Climate Puzzle,” Climate Leadership Council, January 2017, https://www. clcouncil.org/wp-content/uploads/2017/02/Unlocking_The_ Climate_Puzzle.pdf.
This article appeared on the American Enterprise Institute website at https://www.aei.org/publication/the-deeply-flawed-conservative-case-for-a-carbon-taxconservatives-endorse-the-broken-windows-fallacy-reject-evidence-and-rigor/

 

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