As this newsletter goes to press, oral arguments before the Supreme Court are underway in West Virginia v. EPA. This case could help settle the issue of EPA’s Clean Air Act authority to regulate greenhouse gas emissions. The ramifications of the decision in this case may be profound and we’ll stay plugged in as the year progresses.

In the meantime, read on to familiarize yourself with different angles on the recent decision out of the Western District of Louisiana regarding the Biden administration’s social cost of carbon directive.

MIT Sloan

February 22, 2022:

The link above is to a write-up from MIT’s Sloane School of Management on Professor Deborah Lucas’s recent podcast appearance with Barclays’ Jeff Meli. The write-up recapitulates what it calls “six arguments for a carbon tax”:

1. Carbon taxes minimize the total cost to society of emission reductions.

2. Carbon taxes are transparent.

3. Carbon taxes are enforceable.

4. Carbon taxes produce explicit revenues.

5. Carbon taxes are adjustable.

6. Carbon taxes reduce uncertainty.

IER’s Take

Let’s break these points down one-by-one.

First, do carbon taxes minimize the total cost to society of emission reductions?

Relative to other emissions reduction policies, there’s a strong case for this claim. What this point misses, however, is that carbon taxes could reduce wealth creation so severely that the losses overwhelm the costs from global warming that the emissions reduction is intended to avoid. What’s more, when we miss out on wealth generation, we miss out on technological advancement, so taxing emissions now might actually delay or block the development of technologies that could mitigate warming or eliminate emissions in future.

Second, are carbon taxes transparent?

Carbon taxes could be transparent, in the sense that a politically-established price is visible, but it’s essential that we know how that price is set. Historically, taxes on externalities have aimed at setting a price to cover the marginal cost of the activity in question. From that framework emerges the idea of a social cost of carbon: how costly is each unit of greenhouse gases we release into the atmosphere? How that figure is reached is a matter of persistent debate, and is far from what a layperson would call transparent.

Today, the policy momentum is toward a “net zero” carbon tax that would set the pricetag of one tonne of emissions with the goal not of accounting for costs, but of eliminating emissions regardless of cost. The justification for such a goal remains opaque at best.

Third, are carbon taxes enforceable?

As Russia’s February invasion of Ukraine vividly demonstrates, the international order is anarchic. If we enact a carbon tax in the U.S., there’s no reason to believe countries like Russia will follow suit. In fact, their leverage in the international system will grow. We can enforce a carbon tax at home, sure, but the result will be what is known as leakage, in which emitting activities, like manufacturing, flee to lower-cost jurisdictions.

Fourth, do carbon taxes produce explicit revenues?

Yes—can’t argue with that. But how would/should those revenues be used? The literature tends to support reducing taxes elsewhere to render the carbon tax revenue-neutral. But as with the emerging “net zero” challenge to the social cost of carbon, the best economic approach isn’t winning in the arena of politics, where doling out revenue in the form of lump-sum payments has more favor.

Fifth, are carbon taxes adjustable?

Yes, and that further erodes MIT’s second point. How transparent is a policy that can be adjusted at whim?

Sixth, do carbon taxes reduce uncertainty?

It’s ridiculous to claim such a thing immediately after hailing carbon taxes’ adjustability.

Competitive Enterprise Institute

February 11, 2022:

In a sweeping ruling from the Western District of Louisiana, Judge James D. Cain, Jr. ruled that the Biden administration must shelve its version of the “social cost of carbon” (SCC) for any regulatory action.

Judge Cain’s ruling echoes much of what we have written in recent years—that the administration is bound to follow the guidelines from the Office of Management and Budget (OMB) Circular A-4, published in 2003. With regard to the cost of regulations, Circular A-4 states:

Your analysis should focus on benefits and costs that accrue to citizens and residents of the United States. Where you choose to evaluate a regulation [such as one based on the SCC] that is likely to have effects beyond the borders of the United States, these effects should be reported separately. The Biden administration paid no heed to what OMB said.

Judge Cain’s ruling:

Orders “[d]efendants [the administration] to return to the guidance of Circular A-4 in conducting regulatory analysis;”

Enjoins the administration from “[a]dopting, employing, treating as binding, or relying upon any Social Cost of Greenhouse Gas estimates based on global effects or that otherwise fails to comply with applicable law” [Emphasis added]; and

Enjoins the administration from “[a]dopting, employing, treating as binding, or relying upon any estimate of the Social Cost of Greenhouse Gases that does not utilize discount rates of 3 and 7 percent or that otherwise does not comply with Circular A-4.”

IER’s Take

Ostensibly, Judge James D. Cain’s ruling throws sand in the gears of the Biden administration’s climate policy agenda. Given all that we know about the administration’s plans to use the social cost of carbon to constrain American energy choices, this is a welcome development. While a compelling moral case can be made for considering global harms associated with warming, such a momentous consideration should rightly belong with the U.S. Congress. Moreover, as IER has long argued, if we’re going to pursue the social cost of carbon exercise it is certainly the case that the 7-percent discount rate should be modeled.

That said, Jonathan Adler, writing here for Reason, argues that it is incorrect to assert that the Biden administration is under any requirement whatever to adhere to OMB Circular A-4, issued during the Bush 43 presidency. Adler argues that President Biden is within the law to issue this guidance as he sees fit and that the findings of the administration’s working group do not constitute “anything that could remotely be considered a ‘final agency action.’” Thus, he avers, the case should not ever have been deemed justiciable by the district court.

While Pat Michaels, author of the linked post above, and Devin Watkins, also writing for the Competitive Enterprise Institute, suggest Judge Cain’s ruling will stand up at appeal, Adler charges the district court with “invent(ing) new [administrative law doctrines],” and “would like to think the appellate court will not repeat the district court’s errors.”


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