This month’s recap features a climate policy briefing paper from the Cato Institute and three of my own op-eds.
While Build Back Better will be building back in January after being shelved by the Senate, one contentious issue that’s still live is the BBB methane fee. Two of the op-eds below are on the short-sightedness of this proposal. The third is on the confused carbon tax arguments from the Young Conservatives for Carbon Dividends, one of the Climate Leadership Council’s sundry youth wings.
Below you’ll find IER’s take on the Cato paper, excerpts from each of my pieces, and links to the full texts.
What should policymakers do about the climate change that results from anthropogenic emissions of carbon dioxide (CO2) and other greenhouse gases?
For many, the answer is “whatever it takes to slash emissions,” thus implying a broad range of carbon‐reducing regulations, subsidies, tax credits, and more. And this perspective usually argues for doing more of these policies, based on the assumption that climate change is an “existential” threat and that the only sensible goal is elimination of carbon‐based fuels.
Economics, however, gives a different answer. First, while economics accepts that carbon emissions generate externalities, implying that laissez faire might yield excessive emissions relative to the efficient outcome, it suggests these externalities are finite. This means policy should consider reducing emissions but only to the point where the marginal social benefits of reductions equal the marginal social costs of doing so. Second, economics suggests that, despite the theoretical case for policies that reduce emissions, existing government attempts are rife with problems: this implies that replacing the existing hodgepodge with a carbon tax might be better. Third, economics also predicts that while an ideal carbon tax would improve on the current regime, any real‐world carbon tax will also suffer serious deficiencies and might be worse than laissez faire.
Jeffrey Miron and Pedro Braga Soares get a lot right here, and it’s encouraging to read this analysis from Cato, the nation’s leading libertarian think tank.
I think their strongest arguments come in the section titled “Shortcomings of a Real-World Carbon Tax” in which they correctly warn, “this process is rife with uncertainty, and varying assumptions lead to wildly different estimates.” Projecting physical effects from greenhouse gas emissions decades into the future is bound to be error-prone. Translating those effects into economic terms is virtually impossible. Moreover, as I described in my 2019 policy paper, The Case Against a Carbon Tax, and as Miron and Braga Soares argue here, the discounting and time-horizon assumptions implicit in carbon pricing are suspect.
The authors also succinctly describe the inherent pitfalls in policymaking:
Political economy and public choice issues add to the challenge of enacting an ideal carbon tax. As a result, one might get lower‐than‐optimal tax rates, non‐budget‐neutral taxes, or a carbon tax on top of extant regulations and subsidies. A carbon tax below the marginal social cost of carbon might be better than none at all, but budget non-neutrality or an add‐on tax could be worse than doing nothing.
While this is a strong paper, I do think, however, that the authors could go further in challenging the theoretical case for carbon taxes. Where it would seem the authors concede is on the premise of the perfectly competitive general equilibrium (PCGE) that undergirds Pigouvian carbon taxation. “If properly set,” they write, “such a tax forces parties to any transaction to consider the burden their production and consumption decisions impose on others; parties will only agree if the remaining surplus is greater than the externality.”
But how can a tax based on the unknowable variables that constitute the idea of a social cost be “properly set”? I do not think it can be.
The most cogent argument for why that I’ve encountered is in Roy Cordato’s monograph, Welfare Economics and Externalities In An Open Ended Universe: A Modern Austrian Perspective.
Rather than clumsily summarizing, I’ll let you read from Cordato’s conclusion in his own words:
(R)eal-world market processes are open-ended, (and) real-world human actors necessarily pursue goals within an open-ended framework of trial and error. In other words, knowledge of means are neither perfect nor ‘given’ to anyone in the system—not market participants, not policy makers, and certainly not economists. This is a world that differs very significantly from the one that is typically assessed by economists. Following the distinction emphasized by Mises, Hayek, and later, Buchanan, it is a world that is best described as a ‘catallaxy’ not an ‘economy.’ It is a setting where individuals, through the process of exchange, pursue goals that are ranked on individually determined value scales. Because these rankings cannot exogenously be fused together or even observed, there is no perspective from which to make value objective. This means that concepts such as social costs and social benefits, and distinctions such as those that are made between private and social costs or benefits, are not only arbitrary, but simply fabrications of the economist’s mind.
I recommend reading Cordato’s work in full, which can be found at the link above or here on Amazon.
Here are the excerpts my three climate tax op-eds from the month:
Colorado companies are leading a national revolution in energy industry emissions reduction, but politicians in Washington are failing to keep pace with the changes. The latest evidence is the new methane fee tucked within the $1.75 trillion Build Back Better plan that has passed the House and awaits Senate deliberation.
(T)he fee comes amid remarkable — and accelerating — industry improvements in methane emissions. From 1990 to 2019, while U.S. oil and natural gas production grew by more than 50% and more than 100%, respectively, methane emissions from oil and gas systems dropped by more than 15% in absolute terms. The reason for this is obvious: companies are in the business of selling resources, not wasting them. To the extent that technology and infrastructure allow, energy companies want to bring as much methane to market as is possible.
The most tantalizing example across the whole country of this phenomenon is happening in Colorado and nearby states, where an environmentally-positive alliance has been forged between oil and gas and the world of cryptocurrency — two industries that are typically maligned for their environmental costs. Colorado-based Crusoe Energy and Wyoming-based JAI Energy are now using methane that would otherwise be burned off via flaring to instead power computers performing cryptocurrency proof-of-work operations.
At root, this is a crystalline demonstration of the market process and the Colorado spirit bringing supply and demand together in an ever more environmentally-friendly way. That’s something the Build Back Better methane fee can never replicate. While the industry is surging forward with problem-solving verve, the methane fee shows Washington is stuck in an outdated, punitive paradigm.
As Roll Call has noted, the plan’s supporters are playing three-card monte to hide the nature of the new scheme. First it was a “charge,” then it was a “fee,” now it’s being called a “penalty.” For all intents and purposes, it’s a tax, and the verbal gymnastics are meant to conceal the bottom line: the methane scheme will push our energy costs even higher. Benjamin Zycher, an economist at the American Enterprise Institute, calculates that the cost to the U.S. economy will exceed $10 billion in the scheme’s first year and only increase from there.
Supporters like Colorado Representative Diana DeGette say the methane scheme is an application of the “polluter pays” principle. According to Rep. DeGette, “Customers won’t be paying a fee on gas delivered. The only fee will be paid [by an operator] on what doesn’t make it to the consumer.”
While producers will pay directly, in the end we’ll all be paying. The new tax on methane emissions would increase substantially the cost of producing oil and gas. The oil and gas products we use for driving, heating our homes, powering our businesses, and much else will thus cost more.
Like mushrooms after a rain, new pro-carbon tax youth groups are sprouting before our very eyes. Unlike wild mushrooms, however, this growth is anything but organic.
The latest iteration, High Schoolers for Carbon Dividends, joins Students for Carbon Dividends and Young Conservatives for Carbon Dividends. Each draws its framework from the so-called Baker-Shultz plan, which would tax oil, natural gas, and coal at a clip of $40 per ton of carbon emission and dole out the proceeds in the form of cash payments that it calls carbon dividends.
While I’m sure the young activists affiliated with High Schoolers for Carbon Dividends (HS4CD) and Students for Carbon Dividends (S4CD) feel part of grassroots groundswell, I wonder if they’re aware of the Baker-Shultz plan’s genesis. Do they know, for instance, that the Founding Members of the coalition’s grown-up iteration, the Climate Leadership Council, include a who’s-who of history’s largest corporate emitters?
Do they know that a star lobbyist for one of those Founding Members, ExxonMobil, was caught on tape this year describing his company’s perfidy in the entire endeavor? “There is not an appetite for a carbon tax. It’s a nonstarter,” the Founding Member’s lobbyist was recorded saying. “And the cynical side of me says, ‘Yeah, we kind of know that.’ But it gives us a talking point.”
While the Young Carbon Pioneers of HS4CD and S4CD can perhaps be forgiven for their naïve exuberance (particularly since the Climate Leadership Council gave ExxonMobil the Yezhoz treatment, scrubbing it from its website), the Young Conservatives for Carbon Dividends warrant more scrutiny.