Below you’ll find three carbon tax papers. The first, from the Roosevelt Institute, proposes a re-thinking of the social cost of carbon. The second, from the Competitive Enterprise Institute, offers a wholesale repudiation of carbon taxes. The third, from university researchers in North America and Europe, challenges a common carbon tax political argument.
(T)hus far the [social cost of carbon] has been estimated using Integrated Assessment Models (IAMs) that do not consider the global cost of reaching any particular temperature or emissions target and rely on assumptions that, when altered, provide widely varied estimates.The output of these models alone cannot be relied upon to produce reliable estimates of the SCC that are in line with international temperature targets or domestic emissions targets. The interim values produced by the Interagency Working Group (IAWG) on the SCC range from $62 by 2030 to $85 in 2050 (assuming an average discount rate of 3 percent)—values far lower than those needed to limit warming to well below 2°C or reach net zero by 2050.
The international community has balanced the risks of increased climate change with the reasonable costs of containing it, and has agreed on keeping temperature change to well below 2°C. Having made that commitment, the task at hand is how to efficiently implement it, which includes a derivation of the SCC that reflects the targets that have been set.
In simple terms, the authors propose to work backward from the goal of limiting global warming to well below 2°C in order to establish a social cost of carbon. This is an outright inversion of the social cost framework theorized by Arthur Pigou and applied to climate change by Nobel-winner William Nordhaus. The Pigouvian-cum-Nordhausian approach, while flawed, proceeds with a clear logic: determine the cost of an externality, translate it into present-dollar terms, apply the cost to the behavior causing the externality.
The proposal put forth here by Nicholas Stern, Joseph Stiglitz, Kristina Karlsson, and Charlotte Taylor instead assumes the validity of a politically-determined goal and suggests a means of reaching it. This is a complete abandonment of the Pigouvian theory and puts the work of economists toward political purposes. It is not evidence-based policy.
Why, pray tell, would the “international community” hold determinative power over a metric meant to give us an objective assessment of the costs of climate change? As I wrote last year for National Review, if we don’t have trustworthy estimates of climate damages, as the authors here admit, how do we know zeroing out carbon emissions is a cost-efficient endeavor?
In addition to my link above, I recommend reading Marlo Lewis’s response to the Roosevelt paper, where he writes:
“Apparently, the value in calling a NetZero-aligned ‘shadow price’ the ‘social cost of carbon’ is that it makes a politically determined emission-reduction target look more like a science-based target, even though the authors reimagine the SCC to match a price derived from a policy agenda rather than from SCC calculation models.
This will fool only those who want to be fooled. As Stern et al. probably know, the concept of a Pigou-style carbon tax calibrated to the SCC does not assume that fossil fuels should be taxed out of existence. Rather, the ostensible purpose is to make fossil-fuel producers and consumers bear the full (economic + social) cost of GHG-emitting energy. By thus ‘internalizing’ (paying for) the ‘external’ costs of their actions, an SCC-based carbon tax supposedly leads to the ‘socially efficient’ level of consumption, which may be substantially above zero.”
A tax on carbon dioxide (CO2) emissions, contrary to its advocates’ claims, is a market-rigging policy, not a free market one. Its purpose is to drive investment into renewable energy sources not by lowering their cost or improving their performance but by handicapping competing technologies. Carbon taxes would inflict substantial losses on GDP, job creation, and household income. Even the most aggressive CO2 tax would have negligible climate effects, and costs would far exceed benefits. A realistic assessment of the potential economic damage must also consider the costs created by adding CO2 taxes to a panoply of other policies targeting the fossil-fuel industry. A CO2 tax would exacerbate rather than replace the costs of other less efficient climate policies.
Speaking of Marlo Lewis, I missed this important carbon tax paper he published last month. Here are the key points:
- Carbon taxes, though often promoted as market-based, are used to guide the market toward a preferred outcome. As put by former President Barack Obama, the point of taxing greenhouse gases is to “finally make renewable energy the profitable kind of energy in America.”
- A carbon tax will directly increase consumer and business energy costs, thereby harming economic growth and household income.
- The economic risks of a carbon tax cannot be evaluated in isolation, because the policy is part of a wider agenda to weaken energy firms.
Scholars have identified diverse barriers to public acceptance of carbon taxes, including perceptions that the policy will not reduce emissions, that it is too costly, that it is regressive and that it might undermine economic prosperity.
In response to this opposition, interest has grown in deploying carbon tax revenues to boost public support. Carbon tax revenues can be directed towards environmental spending or can be paired with tax cuts, although this latter approach may be less effective than green spending at reducing public opposition or only effective for some voters. However, earmarking through either spending or tax cuts may lack high visibility, and voters may distrust that governments will deliver or maintain these benefits. Instead, it has been suggested that highly visible lump-sum rebates or ‘dividends’ could be more effective in winning public support and reinforcing that support over time as beneficiaries become accustomed to regular dividends.
Overall, our results speak to growing interest in recycling carbon tax revenues in the form of lump-sum rebates to mitigate persistent public opposition to carbon taxes. We explore existing policies, as implemented, in Canada and Switzerland using a new longitudinal opinion panel as well as two survey experiments. We find only limited evidence that these existing policies have reshaped the politics of carbon pricing to date.
The lump-sum rebate (branded as a “dividend” by carbon tax advocacy groups like the Climate Leadership Council) is the ascendant tax revenue-recycling strategy today. At IER, we have expended much effort to challenge the economics of the lump-sum rebate, but, to me, it makes sense that this approach—dishing money back out to households—has become prominent. It helps to bridge the ideological divide between the political left and right and seems like a way the tax advocates could get one through on Capitol Hill.
I must admit, therefore, that I find the results of this evaluation of the effect of real-world payments on public support for carbon taxes surprising. Whether this provides any useful guidance, I cannot yet say. It would seem, though, that the authors’ insight that people aren’t cognizant of the relationship between the tax and the benefit they receive in Canada and Switzerland will help tax advocates to refine their proposals.