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FOR IMMEDIATE RELEASE
March 11, 2009
CONTACT:
Laura Henderson (202) 621-2951

WASHINGTON, D.C. – As our federal lawmakers continue to lay the groundwork to regulate and tax carbon, Institute for Energy Research (IER) today released two studies that analyze the economic impact that two of these proposals would have: the carbon tax and the so-called “Carbon Fed.” Though they differ in degree and detail, both programs would further extend the government’s role in Americans’ lives and increase taxes and energy costs—though the benefits of these policies remain unclear. 

“Americans know that the government’s heavy-handed attempts to tax, regulate, and commoditize carbon will kill jobs, decrease our ability to use our domestic energy resources, and prolong our current economic downturn,” said IER President Thomas J. Pyle.” 

“Policymakers should use the traditional legislative process—which would produce a straightforward plan that is honest about both the cost and the returns—to achieve these ends.  Unfortunately, the carbon tax and Carbon Fed are reflective of a backdoor strategy that provides little transparency to the public, not to mention that both would have potentially disastrous effects on our economy.”

Carbon Tax Background:

Carbon taxes’ supporters have grown in number as the debate over cap and trade continues.  Carbon Taxes: Reducing Economic Growth–Achieving No Environmental Impact explains that though economists favor carbon taxes, lawmakers hesitate, as taxpayers will not support a large, visible tax increase. The carbon tax, for which supporters’ best argument is that it’s better than cap and trade, would not only significantly increase Americans’ tax burdens, but would prove ineffective in its goal to reduce global carbon dioxide emissions.   

Carbon Fed Background:

Our current financial troubles clearly demonstrate that even well-intended financial regulatory bodies, such as the Federal Reserve, have the capacity to make mistakes that harm our economy. The Dangers of a "Carbon Fed" examines recent proposals to create a powerful body to control the way we access, use, and pay for our energy, as well as the likely outcomes of such plans. The financial sector’s recent performance shows that complex financial instruments with little intrinsic value, such as carbon permits, are susceptible to manipulation and game-playing that can lead to terrible results.

More from IER on the current trends in energy policy:

· Blog Posting: Low Carbon Fuel Standards: Recipes for Higher Gas Prices & More Foreign Oil

· Press Release: Administration Attempts to Sneak Biggest Tax Increase in History into Budget

· IER Study: Green Jobs: Fact or Fiction?

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

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www.InstituteforEnergyResearch.org

Energy makes modern society possible. It lights the night, heats our homes, powers our entertainment, and most importantly, it helps us conserve the ultimate non-renewable resource—time. Energy amplifies our ability to do work. Machines help autoworkers assemble cars, power tools help construction workers build our homes, gasoline-powered automobiles help us take care of our families, diesel-power trucks distribute fresh produce across the country, and electricity-powered computers give us unprecedented access to information. But the energy that supplies 85 percent of our needs—coal, oil, and natural gas—are under attack. Politicians and special interest groups are proposing various methods to tax these abundant and reliable sources of energy.

The newest attack on oil, natural gas, and coal are proposals to tax carbon dioxide emissions. Noted economist Art Laffer and current U.S. Rep. Bob Inglis (R-S.C.) argued in favor of a carbon tax in a New York Times[1] op-ed. Author, commentator, and syndicated columnist Charles Krauthammer made his case for a large increase in the gas tax in the Weekly Standard .[2] And Fred Smith, the CEO of FedEx, has publicly declared his support for a tax on carbon dioxide emissions.

The arguments boil down to the assertion that carbon taxes are favorable because they are better than cap and trade schemes. This is correct, but it does not mean that we should implement carbon taxes. Carbon tax implementation would run into many of the same problems that have plagued cap and trade. Politicians cannot resist new opportunities to raise tax revenues and dole out our dollars to favored constituencies, especially when the revenues range from hundreds of billions to trillions of dollars. Carbon taxes might hold some allure, but ultimately they are economically destructive. Neither carbon tax nor cap and trade is good for American consumers.

Reasons Why Carbon and Energy Taxes are a Bad Idea:

1. Carbon taxes are taxes on 85 percent of the energy we use. A carbon tax would impose a new tax on the vast majority of our nation’s economic activity. Fossil fuels power our nation and produce 85 percent of the energy we consume in the United States. [3] Nuclear and hydro power produced an additional 11 percent of our energy.[4] The remaining 4 percent comes from other renewables like biofuels, wind, and solar.[5] Carbon taxes may make hydro and nuclear power more attractive, but few sites remain where it is possible to build large hydroelectric dams and new nuclear power plants face major political obstacles.

2. A carbon tax that is perfectly offset by other tax cuts is neither a practical nor a political reality. The history and nature of politics shows that once politicians institute a tax, they will not give it up. Still, some argue in favor of a “tax swap” to reduce income taxes while implementing a new tax on carbon dioxide emissions. Theoretically, this could make sense. However, the argument does not reflect political reality.

The first challenge for promoters of a carbon tax “tax swap” is getting lawmakers to pass a carbon tax. Lawmakers are very wary of imposing easily identifiable taxes across the entire population. Instead, politicians prefer to hide the costs of government programs, while rewarding discrete and identifiable groups. Implementing carbon taxes would result in an identifiable tax increase similar to the unpopular gas tax increases that led to voter displeasure revolts against President George H.W. Bush and President Bill Clinton.

The second challenge for promoters of a “tax swap” is getting Congress to reduce income taxes. Congress could decrease some income taxes, but it is highly unlikely income taxes would be decreased for all income brackets.

Taxpayers will likely fight against a “tax swap” because they understand there is nothing to stop future lawmakers from increasing carbon taxes or returning income taxes to their former levels. Worse, from a taxpayer’s perspective, a carbon tax will give lawmakers another vehicle to raise large amounts of tax revenue.

Some argue that a revenue-neutral “tax swap” would be economically beneficial. There is, however, little evidence politicians are concerned about the economic effectiveness of plans to reduce carbon dioxide emissions. Most economists agree that carbon taxes are a superior to cap and trade.[6] Carbon taxes are more transparent, more understandable, and less subject to political manipulation. Though economists prefer carbon taxes, congressmen strongly prefer cap and trade plans.[7] Lawmakers have floated many cap and trade proposals, but they have not discussed any serious carbon tax proposals.

Lawmakers say they favor economically efficient global warming plans, but their actions demonstrate that the discussion about efforts to reduce greenhouse gas emissions is not about science or economics—it is about politics. Offsetting income taxes with carbon taxes is not a political reality because politicians will not propose such obvious tax increases on all Americans.

3. Politicians like to reward special interest groups with new tax revenues. When politicians have large amounts of tax dollars at their disposal, they tend to spend it on projects that reward special interest groups. A carbon tax would likely generate over $1 trillion in new revenue. Much of this revenue would likely be spent on inefficient “pork” projects.

The proposed cap and trade schemes contain hundreds of billions of dollars for special interests. The recession has spurred additional calls for hundreds of billions of dollars in additional spending to create “green jobs.” For example, the Center for American Progress is calling on Congress to spend $100 billion to create two million “green jobs”[8] and the Apollo Alliance wants Congress to spend $500 billion to create five million “green jobs.”[9] If a carbon tax were in place, lawmakers would almost certainly divert resources to “green job” subsidies or other similar programs, rather than back into taxpayers’ wallets.

4. It is impossible to create an optimal carbon tax. A carbon tax would need to be set at an optimal level that accounts for the economy and climate science. This is an impossible task. One of the greatest insights of the 20^th century was that economically efficient central planning is not possible. Friedrich Hayek and others demonstrated that central planners cannot aggregate all of the information necessary to make economically efficient choices.[10] Their insight remains true today. A planner (or Congress) cannot create an optimal tax because he or she does not have all of the necessary information. With global warming, the lack of perfect information is further compounded by partisan politics and uncertain climate science. This makes it impossible to determine an optimal carbon tax.

The cost of a carbon tax will increase the costs of nearly everything that is produced, manufactured, or transported, including food and gasoline. How one would construct a credible methodology for accurately and precisely measuring and accounting for these effects remains, perhaps intentionally, an unaddressed question.

5. A carbon tax is a regressive tax, but increased wealth transfers will likely make it increasingly progressive. Lower income families spend more of their income on energy than higher income families. The Wall Street Journal explains:

The Congressional Budget Office—Mr. Orszag’s former roost—estimates that the price hikes from a 15% cut in emissions would cost the average household in the bottom-income quintile about 3.3% of its after-tax income every year. That’s about $680, not including the costs of reduced employment and output. The three middle quintiles would see their paychecks cut between $880 and $1,500, or 2.9% to 2.7% of income. The rich would pay 1.7%. Cap and trade is the ideal policy for every Beltway analyst who thinks the tax code is too progressive (all five of them).[11]

It appears that some of the proponents of carbon taxes are some of those five beltway analysts who believe the tax code is too progressive. They argue in favor of a carbon tax because it will not retard the formation of capital because it applies to everyone. In other words, since it would be spread over the population without regard to income, carbon tax proponents argue it will not reduce the incentives for high-income earners to generate wealth and create new jobs.

This alleged advantage, however, would never last politically because a carbon tax will be a visible and ever-increasing new tax. In response to that reality, lawmakers are likely to execute new, politically popular transfers of wealth—all with an eye on limiting the tax’s effect on lower-income families. Sales taxes, for example, could be uniformly applied across the economy, but in practice, sales taxes vary on certain items, in part, to help lower-income Americans deal with the increased costs imposed by them.

Carbon taxes would likely be accompanied by various rebate schemes to soften the regressive nature of the tax and make it a more progressive tax. This is currently happening with cap and trade proposals. One plan calls for the government to auction all emission permits and give each citizen a $700 check every year.[12] Another option is to only give the rebate checks from auction revenues to lower-income citizens.[13]

If the government imposes a carbon tax, it is very unlikely that the tax will remain uniform. In the end, not only will it hit the poor with a disproportionate burden of a carbon cap, but it will create yet another series of loopholes in the tax code.  As history has shown, such a plan will further distort the market, render the tax code even more complicated, and hide yet another round of handouts to well-connected special interests.

6. A carbon tax set at a wrong level will cause great economic harm. Even the proponents of carbon taxes, such as Yale University Professor William Nordaus, find that once there is deviation from worldwide participation, the costs of achieving environmental global improvements dramatically rise. Nordhaus’ economic model shows that an overly ambitious and/or inefficiently structured policy can swamp the potential benefits of a perfectly calibrated and efficiently targeted plan.[14] For example, Nordhaus’ optimal plan yields net benefits of $3 trillion ($5 trillion in reduced climatic damages and $2 trillion in abatement costs). Yet, other popular proposals have abatement costs that exceed their benefits. The worst is former Vice President Al Gore’s 2007 proposal to reduce carbon dioxide emissions 90 percent by 2050. Nordhaus’ model estimates this plan would make the world more than $21 trillion poorer than if there were no controls on carbon dioxide.[15]

7. Realistically, a carbon tax would lead to lower energy use and lower economic output because low-carbon replacement technologies simply do not exist. Carbon taxes effectively increase the cost of fossil fuels in an effort to make non-fossil fuels more economically attractive. The technologies to significantly reduce greenhouse gas emissions from fossil fuels, however, are decades away and extremely costly.[16] Instead, the only real way to reduce greenhouse gas emissions in the short run is to reduce energy use and economic output.

Consider automobile use and gas prices. People have begun to transition toward fuel-efficient cars, but the real impact of high gasoline prices in 2008 was to reduce vehicle miles traveled. Just as higher fuel prices led to less driving, higher energy prices will lead to reduced energy consumption. That will lead to a corresponding drop in our ability to make economic choices.

Given current technologies, carbon taxes will result in less economic output. The graphic below illustrates that point. The implication is clear—there is a strong correlation between energy use and GDP.

8. Just because a proposal is “budget neutral” for the government does not mean it is “budget neutral” for American families. Carbon taxes or cap and trade programs will transfer wealth from rural areas, where people drive more and use more energy, to more densely populated urban areas.[17] Not coincidentally, many urban and Northeastern politicians favor a cap and trade program or carbon taxes.

Also, carbon taxes will disproportionally harm states that generate the majority of their electricity from coal-fired power plants.[18] These states tend to be more rural states.

9. Domestic carbon taxes, even in the best case, can only produce marginal impacts on climate. In 2006, China surpassed the United States as the world’s largest emitter of carbon dioxide.[19] But the difference in emission growth rates is striking. According to data from the Global Carbon Project, from 2000 through 2007, global total greenhouse gas emissions increased 26 percent. During that same period, China’s carbon dioxide emissions increased 98 percent, India’s increased 36 percent and Russia’s increased 10 percent. Carbon dioxide emissions in the United States increased by three percent from 2000 through 2007.[20] These data are displayed in the graphic below:

As time goes on, the United States will emit a smaller and smaller share of the world’s total greenhouse gas emissions,[21] which makes unilateral efforts— such as a domestic carbon tax—an ineffective way to influence climate. If the United States were to completely cease using fossil fuels, the increase from the rest of the world would replace U.S. emissions in less than eight years.[22] If we reduced the carbon dioxide emissions from the transportation sector to zero, the rest of the world would replace those emissions in less than two years.[23] Increases in worldwide carbon dioxide emissions are driven by developing economies, not the United States.

10. Domestic carbon taxes will force more industries to leave America. Energy costs are a major expenditure for heavy industry. America’s natural gas prices are the highest in the world,[24] even though we have the world’s sixth largest proven natural gas reserves.[25] The high price of natural gas has significantly contributed to the loss of more than three million manufacturing jobs since 2000.[26] Carbon taxes will drive up the cost of natural gas because companies would use it as a substitute for coal in electricity production, which means increased electricity costs for industry and increased natural gas prices. This is especially troublesome for chemical companies, all of which use natural gas not only as an energy source, but also as a feedstock. Higher natural gas prices will force them to pursue options offshore and overseas, reducing American jobs.

11. Domestic carbon taxes cannot address “leakage.” High costs of doing business in America will force jobs and economic activity to leave this country in favor of countries with lower energy prices. China and India have stated they will not impose burdensome climate regulations on their citizens.[27] Because not all countries will implement carbon taxes, industries will take their jobs to countries where taxes do not eat their profits. Despite a huge American economic sacrifice, global emissions will remain the same.

12. Carbon taxes will lead to calls for trade protectionism. Carbon taxes will lead to reduced economic competitiveness. In turn, organized labor will likely call for new barriers to trade. For example, a top priority for the United Steelworkers is a “border adjustment” to penalize the steel imports from countries that do not curb their greenhouse gas emissions.[28] Increased U.S. trade protectionism will almost certainly lead to greater trade protectionism worldwide that will further harm the American economy and all of America’s trading partners.

13. If we are truly concerned about reducing carbon dioxide emissions, the best path forward is increasing humankind’s ability to adapt. Rich countries and societies can adapt more easily to changed circumstances than poor countries. Environmental improvements are more likely to be realized in prosperous societies than in poorer ones.[29] Carbon taxes and cap and trade reduce society’s aggregate wealth, which make environmental improvements more difficult to achieve.

14. Real world experience counsels against a carbon tax. Ken Green, a former supporter of a revenue-neutral carbon tax, changed his mind because of political and economic realities. Mr. Green writes: [30]

I previously felt that a revenue-neutral carbon tax was a good idea, because it would be both effective and could even be economically beneficial. But three developments have caused me to retract my support. First, rising energy costs have already imposed a huge carbon tax with little GHG reduction. This suggests that the elasticity of energy use could be lower than prior estimates, meaning it would be a useless gesture. Second, as implementations of carbon taxes in Europe and Canada have demonstrated, governments simply cannot implement such tax systems without sucking up some of the revenue, and using the rest to benefit crony-capitalists and steer money to favored constituencies. And finally, because using biofuels such as ethanol would let people save on carbon taxes, demand for such fuels will grow, only compounding the environmental and nutritional mischief they cause.

Just because a carbon tax is a bad idea does not mean that cap and trade is better

Nearly all of the above arguments against a carbon tax apply equally to cap and trade schemes. The only real difference is that cap and trade is a stealth tax that brings a large amount of reporting, implementation, and regulatory problems.

The point of cap and trade plans, like carbon taxes, is to increase the price of energy from oil, coal, and natural gas. Lawmakers may say they have plans to rebate some people so that everyone does not suffer, but it is not possible to craft a cap and trade plan that is perfectly offset by rebates. Just because a politician promotes a plan that is “budget neutral” for government does not mean it is “budget neutral” for American families. When politicians redistribute money, there will be winners and losers. The winners will be the politically well-connected groups and the populace as a whole will lose.

Like carbon taxes, it is not possible to set a cap for cap and trade plans at an optimal level. The smartest people in the world could not aggregate enough data quickly enough to discover the optimal level of the cap or a cap and trade scheme or the level of a carbon tax. It would require too much data about American’s preferences and about uncertain climate science. To complicate matters, if the cap set at the wrong level, or if the plan does not include all nations, the inefficiencies will swamp any possible benefits. Most disturbingly, if the United States unilaterally reduces our carbon dioxide emissions, it will not have a real effect on global carbon dioxide concentrations. This means there will be no environmental benefits to the United States unilaterally reducing carbon dioxide emissions.

Cap and trade schemes are very regressive taxes. They will transfer wealth from poorer areas of the country to wealthier areas. Cap and trade will also reduce energy use and thereby reduce economic output. Also, if we drive up costs, cap and trade plans will reduce American economic competitiveness and cause more jobs to flee to foreign countries.

In short, cap and trade and carbon taxes are two different ways to raise energy prices. Both carbon taxes and cap and trade would harm the United States’ economy without making any meaningful differences in global concentrations of carbon dioxide.

Conclusion

Energy is the lifeblood of the economy. Policies that increase the price of energy harm the economy. However, the entire point of policies like carbon taxes and cap and trade is to increase energy prices. These cost increases make the economy less efficient domestically and it makes the United States less economically competitive internationally. Higher energy prices harms America’s ability to grow its economy at home and it means more American jobs will be shipped overseas.

Now is not the time to implement an economically harmful plan like carbon taxes or cap and trade. Americans need an efficient economy to reverse the recession and improve the lives of American workers. Carbon taxes and cap and trade will just make it more difficult to reverse the recession.

[2] Charles Krauthammer, The Net-Zero Gas Tax: A Once in a Generation Chance, Jan. 5, 2009, http://weeklystandard.com/Content/Public/Articles/000/000/015/949rsrgi.asp

[3] Energy Information Administration, U.S. Energy Consumption by Energy Source, http://www.eia.doe.gov/cneaf/alternate/page/renew_energy_consump/table1.html. (May 2008).

[4] Id.

[5] Id.

[6] See e.g. William D. Nordhaus, Life After Kyoto: Alternative Approaches to Global Warming Policies, NBER Working Paper No. 11889, Dec. 9, 2005, http://www.econ.yale.edu/~nordhaus/homepage/kyoto_long_2005.pdf; N. Gregory Mankiw, One Answer to Global Warming: A New Tax, N.Y. Times, Sept. 16, 2007, http://www.nytimes.com/2007/09/16/business/16view.html; Kenneth P. Green et. al., Climate Change: Cap vs. Taxes, American Enterprise Institute Environmental Policy Outlook, June 1, 2007, http://www.aei.org/publications/filter.all,pubID.26286/pub_detail.asp.

[7] The following is some of the cap and trade bills introduced during the 110^th Congress: S. 2191, The Climate Security Act of 2008; S. 1766, the Low Carbon Economy Act, S. 280, the Climate Stewardship and Innovation Act; S. 309, the Global Warming Pollution Reduction Act; S. 485, the Global Warming Reduction Act; H.R. 620, the Climate Stewardship Act; and H.R. 1590, the Safe Climate Act of 2007.

[8] Robert Pollin, et. al, Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy, Sept. 2008, http://www.americanprogress.org/issues/2008/09/pdf/green_recovery.pdf.

[9] Jeffery Ball, Does Green Energy Add 5 Million Jobs? Potent Pitch, but Numbers are Squishy, Wall Street Journal, Nov. 7, 2008, http://online.wsj.com/article/SB122601449992806743.html.

[10] See e.g. Friedrich A. Hayek, The Use of Knowledge in Society, 4 Am. Econ. Rev. 519 (Sept. 1945).

[11] Editorial, Who Pays for Cap and Trade? Wall Street Journal, March 9, 2009.

[12] James K. Boyce & Matthew Riddle, Cap and Dividend: How to Curb Global Warming While Protecting the Incomes of American Families, Political Economy Research Institute (Nov. 2007), http://www.peri.umass.edu/fileadmin/pdf/working_papers/ working_papers_101-150/WP150.pdf.

[13] Robert Greenstein et. al., Designing Climate-Change Legislation that Shields Low-Income Households from Increased Poverty and Hardship, Center on Budget and Policy Priorities (May 9, 2008), http://www.cbpp.org/10-25-07climate.pdf.

[14] Robert P. Murphy, Rolling the DICE: Nordhaus’ Dubious Case for a Carbon Tax, p. 20, June 2008, http://www.instituteforenergyresearch.org/wp-content/uploads/2008/06/2008-06_rolling_the_dice_murphy.pdf.

[15] Id. at 20.

[16] See Kenneth P. Green, Climate Change: Science and Policy, Oct. 27, 2008, http://www.aei.org/publications/filter.all,pubID.28838/pub_detail.asp.

[17] Alaska has the higher per capita energy use, followed by Wyoming, Louisiana, North Dakota and Texas. The states with the lowest energy use per capita are Rhode Island, New York, Massachusetts, California, and New Hampshire. The average Rhode Islander uses only 18% as much energy as an Alaskan and 22% as much energy as someone from Wyoming. See Energy Information Administration, Table R2. Energy Consumption by Source and Total Consumption per Capita, Ranked by State, 2006, Nov. 28, 2008, http://www.eia.doe.gov/emeu/states/hf.jsp?incfile=sep_sum/plain_html/rank_use_per_cap.html.

[18] The states with the most affordable electricity either generate the majority of their electricity from coal-fired power plants or from hydro power. See Energy Information Administration, Table S1. Energy Consumption Estimates by Source and End-Use Sector, 2006, State Energy Consumption Estimates: 1960 through 2006, Nov. 2008, http://www.eia.doe.gov/emeu/states/sep_use/notes/use_print2006.pdf; Energy Information Administration, Table 5.6.B. Average Retail Price of Electricity to Ultimate Customers by End-Use Sector, by State, Year-to-Date through September 2008 and 2007, Dec. 12, 2008, http://www.eia.doe.gov/cneaf/electricity/epm/table5_6_b.html.

[19] See e.g. Netherlands Environmental Assessment Agency, China now no. 1 in CO2 emissions; USA in second position, June 19, 2007, http://www.pbl.nl/en/news/pressreleases/2007/20070619Chinanowno1inCO2emissionsUSAinsecondposition.html.

[20] Calculated using the emission data from the Global Carbon Project. In 2000, China emitted 910,950 GgC, India 316,804 GgC, Russia 391,652 GgC, and the U.S. 1,541,013 GgC. By 2007, China emitted 1,801,932 GgC, India 429,601 GgC, Russia 432,486 GgC, and the U.S. 1,586,213 GgC.

[21] According to the Global Carbon project, in 2007, China emitted 21% of the world’s carbon equivalent and the U.S. emitted 19%.

[22] Calculated using the emission data from the Global Carbon Project. According to these data, the U.S. emitted 1,586,213 GgC in 2007. Without the U.S., the world’s emissions were 5,203,987 GgC in 2000, increasing to 6,884,787 GgC in 2007.

[23] Calculated using the emission data from the Global Carbon Project. According to EPA, the GHG emissions from the transportation sector total 28% of total U.S. emissions. Environmental Protection Agency, Regulating Greenhouse Gas Emissions Under the Clean Air Act; Proposed Rule, 73 Fed. Reg. 44354, 44403 (July, 30, 2008). Twenty eight percent of the U.S.’s 2006 carbon dioxide emissions are 436,141 GgC. From 2005 to 2007, the world’s emissions, with the emissions from the U.S., grew by 476,324 GgC.

[24] Paul N. Cicio, Testimony of Paul N. Cicio, President of Industrial Energy Consumers of America before the House of Representatives, Dec. 6, 2007, http://www.ieca-us.com/documents/IECAHouseTestimony-NaturalGas_12.06.07.pdf.

[25] Energy Information Administration, Annual Energy Review 2007, Table 11.4, http://www.eia.doe.gov/emeu/aer/txt/ptb1104.html.

[26] See Testimony of Paul N. Cicio.

[27] See e.g. Shai Oster, China Asks Rich to Pay for Cleanup, Wall Street Journal, Oct. 30, 2008, http://online.wsj.com/article/SB122530768753281185.html; Nitin Sethi, As Climate Talks Resume, India Accuses UN of Bias, The Times of India, Aug. 21, 2008, http://timesofindia.indiatimes.com/Climate_talks_resume_today_India_accuses_UN_of_bias/articleshow/3386789.cms.

[28] Christa Marshall, Report says climate rules could shut down energy-intensive companies, ClimateWire, Feb. 2, 2009.

[29] Bruce Yandle, Environmental Kuznets Curves: A Review of the Findings, Methods, and Policy Implications, 2004, http://www.perc.org/articles/article207.php.

[30] Kenneth P. Green, Climate Change: Science and Policy, http://www.aei.org/publications/filter.all,pubID.28838/pub_detail.asp.

Cap-and-trade regimes have advantages, notably the ability to set a limit on emissions and to integrate with other countries. But they are complex and vulnerable to lobbying and special pleading, and they do not guarantee success.

The experience of the European Union is Exhibit A.

The Post’s answer to the flaws with cap-and-trade schemes is to implement a carbon tax instead. Cap and trade and carbon taxes have a similar goal—increase the price of energy to encourage conservation. Carbon taxes increase the price of anything that uses oil, coal, or natural gas an input. This includes nearly all goods or services in the United States because 85 percent of the energy we use comes from coal, oil, or natural gas.

Increasing the costs of doing business in American makes it harder for American businesses to compete with foreign companies. The high price of natural gas in the United States has already contributed to the loss of 3.1 million manufacturing jobs since 2000.[1] Higher energy taxes will further drive more businesses overseas and make life more difficult for American consumers struggling to make ends meet.

It is not clear what The Washington Post hopes to accomplish with a carbon tax. The earth has warmed over the past 30 years, but not as much as the climate models predict. Climate alarmists point to the models as evidence of catastrophic warming, even though there has been no warming trend since 2001 according to the satellite data.

One thing that is clear is that a unilateral carbon tax imposed on U.S. citizens will do little to nothing about global warming. Global carbon dioxide emissions are not driven by the United States, but by the developing world. According to data from the Global Carbon Project, between 2000 and 2007 the U.S.’s carbon dioxide emissions increased 3% while China’s increased 98% and became the world’s largest emitter of carbon dioxide. By way of comparison, from 2000 to 2007 India’s carbon dioxide emissions increased 36%, the global total increased 26%, Russia’s increased 10%, and Japan’s increased 3%. These data are displayed in the graph below:

The U.S. will emit a smaller and smaller share of the world’s total greenhouse gas emissions[2] making unilateral efforts, such as a domestic carbon tax, ineffective at influencing climate. If the U.S. were to completely cease using fossil fuels, the increase from the rest of the world would replace U.S. emissions in less than eight years.[3]

The Washington Post says that “A carbon tax, by contrast, is simple and sure in its effects.” This is correct. A carbon tax is simple, and we can indeed be sure of its effects: it will harm America economically with few corresponding environmental benefits.

[1] Paul N. Cicio, Testimony of Paul N. Cicio, President of Industrial Energy Consumers of America before the House of Representatives, Dec. 6, 2007, http://www.ieca-us.com/documents/IECAHouseTestimony-NaturalGas_12.06.07.pdf.

[2] According to the Global Carbon project in 2007 China emitted 21% of the world’s carbon equivalent and the U.S. emitted 19%.

[3] Calculated using the emission data from the Global Carbon Project. According to these data, the U.S. emitted 1,586,213 GgC in 2007. Without the U.S., the world’s emissions were 5,203,987 GgC in 2000, increasing to 6,884,787 GgC in 2007.

While the costs for this action are substantial, the benefits will be miniscule. These regulations will only reduce carbon dioxide emissions by a tiny amount. In fact, if every car in the US met these standards, the amount of carbon dioxide reduced would be overcome by the increase in other parts of the world within 134 days.[1] American jobs, American workers and American family budgets will suffer. Meanwhile carbon dioxide emissions savings will essentially be “background noise.”

According to the rosy and dated estimates from California’s regulators, granting the waiver and allowing California to further regulate automobiles will increase the average price of a car by over $1,000. In addition to California, 16 other states have indicated that they plan to implement California’s costly regulations. If California and other states choose to deliberately increase the cost of automobiles for their citizens, their voters can express their discontent to their government. However, since California and the 13 other states’ citizens make up 50 percent of the nation’s population, in order to make car cost-effectively, automakers will likely be forced to implement California’s regulations on all cars, not just ones for California. This means that California will become the de facto national regulator and all Americans will pay a hidden $1,000+ tax per car.

Worse, there are infinitesimally small benefits generated from the planned regulations. In fact, if every car and truck complied with California’s regulation today (in reality, California’s regulation will likely only apply to new cars and trucks) U.S. emissions of greenhouse gases would decrease by 5 percent overnight.[2] But emissions from the rest of the world are increasing so dramatically that by mid-June, emissions increases from the rest of the world make our decrease moot.[3] This small and costly policy would have no noticeable impact on carbon dioxide emissions.

This program hurts family budgets and transportation affordability and provides no real benefits. It is a luxury that our nation should not be subjected to when economic times were good and we certainly cannot afford it now.

President Obama should ensure that Detroit builds cars Americans want to buy, not to satisfy California’s regulators. After all, should the U.S. be forced to follow the policies of a state nearing bankruptcy and losing massive numbers of jobs?

[2] According to the Energy Information Administration report Emissions of Greenhouse Gases in the United States 2007, http://www.eia.doe.gov/oiaf/1605/ggrpt/pdf/0573(2007).pdf p. 5, U.S. transportation emissions account for 28% of total U.S. carbon dioxide emissions. According to p. 19 of the same report, motor gasoline accounts for 59% of the total U.S. transportation emissions. The California regulations will reduce greenhouse gas emissions from cars and light trucks by about 30 percent. See California Air Resources Board, ARB Approves Greenhouse Gas Rule, Sept. 24, 2004, http://www.arb.ca.gov/newsrel/nr092404.htm. Thirty percent of 59 percent of 28 percent is 5 percent of the total.

[3] See Footnote 2.

When the Boxer-Lieberman-Warner global warming bill was debated on the floor of the Senate June 2nd to June 6th, one thing became clear—the costs of cap and trade style greenhouse gas regulation were enormous. Almost all serious economic analyses agree on this central point.

Despite their defeat in the Senate, the supporters of dramatic cuts in greenhouse gases remain undaunted. In an effort to portray the enormous costs of their plans in a better light, Sir Nicholas Stern was invited to testify before the House Energy and Commerce Committee on June 26th. Stern was the lead author of an official British government report on the costs of global warming–The Stern Review on Climate Change. Compared to the economic literature on global warming this report is an outlier because Stern argues it is economical to spend massive amounts of money on greenhouse gas reduction measures in the near-term.

When Stern published his report in 2006, he concluded that the world needed to spend 1 percent of global gross domestic product (GDP) per year on anti-global warming strategies. Stern estimated that if we failed to act, global warming would cost between 5 to 20 percent of global GDP. He now argues that global warming is happening faster than expected (he makes this claim even though global temperature has not increased since 2000). Because of this alleged quickening of global warming Stern believes we need to spend 2 percent of global GDP to avert the worst of global warming.

Because 1 or 2 percent of global GDP is not a trivial amount of money, the question is how credible are Stern’s assumptions? The short answer is, not very.

When weighing the tradeoff between the present economic costs of CO2 regulation, versus the potential future damages from climate change, policy makers must know how to compare a dollar in 2008 with a dollar in, say, 2088. If market interest rates are used—just as a businessperson would do—then the “present value” of future climate damages is low, and the corresponding “optimal” carbon tax is low. But Stern dismisses the market discount rate as unethical, and instead adopts an artificially low discount rate based on his moral views. This artificially inflates the present value of future climate damages and hence inflates Stern’s recommended carbon tax.

Stern’s use of a “moral” discount rate instead of a market discount rate has resulted in a barrage of harsh criticism from a number of very well-respected economists. Ian Murray of the Competitive Enterprise Institute provides a synopsis of a couple of the most prominent critiques:

• Dr. Richard Tol of Hamburg University, the leading expert on the social cost of greenhouse gases, estimates [ ] the cost of carbon dioxide emissions at around $2/ton[1], not the $86/ton used by Stern. Even at a higher estimate of $12/ton, this translates to just 12 cents on a gallon of gasoline.

• Dr. William Nordhaus of Yale estimates that 3°C of global warming would cost the world $22 trillion this century [in climate change damages]. Stern’s recommendations, based on immediate deep reductions in emissions on the basis of intergenerational equity, would reduce [those damages] to $9 trillion, but at a cost [to the economy] of $26 trillion. Al Gore’s package of measures, which calls on the U.S. to “join an international treaty within the next two years that cuts global warming pollution by 90 percent in developed countries and by more than half worldwide in time for the next generation to inherit a healthy Earth,” would reduce warming costs to $10 trillion, at a[n economic] cost of $34 trillion[2].

Sir Nicholas would like us to spend $26 trillion in order to avert $13 trillion in damages. This is silly. The world would be better off if we stayed with the status quo and dealt with the damages caused by unabated global warming than follow Stern’s recommendations.

[1]. William Nordhaus, The Challenge of Global Warming: Economic Models and Environmental Policy in
the DICE-2007 Model, July 24, 2007.

[2]. William W. Beach et al., “The Economic Costs of the Lieberman-Warner Climate Change Legislation,”
The Heritage Foundation, May 12, 2008, http://www.heritage.org/Research/EnergyandEnvironment/cda08-02.cfm.

IER’s economist, Robert Murphy, takes on Nordhaus’ dubious case for a carbon tax with Rolling the Dice.  The Murphy study is currently under submission at a peer-reviewed economics journal.