Welcome to the Carbon Tax Ticker

The highlight of June for me was speaking on a panel at Johns Hopkins University to an audience of science journalism students. The premise of the panel was the nexus of scientific research and the public policy process. My co-panelists were Nader Sobhani, a climate policy fellow at the Niskanen Center, and Nicholas Bianco, deputy director of the World Resources Institute.

The theme of my comments was that while science can inform policy, it cannot determine policy. No scientific research leads ipso facto to a specific policy conclusion, because we examine policy questions through different lenses. Public policy is fundamentally rooted in political philosophy and derived from ethics. Though it all too often remains implicit, one’s view on the role of government is essential to one’s judgement of a scientific finding’s relevance.

The panel discussion was at times focused on the particulars of climate change and gave me ample opportunity to draw a contrast between the perspective offered by the Niskanen Center’s Mr. Sobhani and my own. I found the audience generally receptive, despite the first question I received from the crowd—which cast doubt on my objectivity on account of IER’s partnership with the Charles Koch Institute. Ultimately, I’m glad to have been prompted to address that concern, since it enabled me to express unequivocally that what we stand for is liberty and the human flourishing that it promotes, regardless of the form that takes.

Below you’ll find a look at what we’ve been reading this month.

The Wedge
Resources for the Future, May 2019 journal article:

First, under each of the recycling options, the use-side impact is regressive: the welfare impact is more negative the lower the expenditure rank of the quintile…Second, for all quintiles, the magnitude of the use-side impact increases with time, paralleling the increasing size of the carbon tax and the associated increases in the scale of the price impacts. Third, the magnitude of the use-side welfare impact in any given year depends on the type of recycling. The impacts are smallest when recycling is via cuts in the corporate income tax…The results in Figure 5 parallel those in Figure 4. Again, the results are regressive and increase with the amount of attention to the longer term.

(T)he overall impacts are progressive under recycling via lump-sum rebates: the very progressive source-side impacts outweigh the regressive impacts on the use side. The overall impact is most progressive under lump-sum recycling, reflecting the strong progressive source-side impact of this form of recycling. Under corporate income tax recycling, the absolute size of the impacts is smaller than under the other recycling methods, and the results are close to proportional.

We leave it to the reader to assess the importance of the distributional objectives served by these policies and decide whether achieving these objectives is worth the sacrifice of efficiency.*

IER’s Take

As has been demonstrated time and again—including by carbon tax supporters—carbon taxes are regressive, meaning that they impact the lower quintiles on an income spectrum more than the others since people with less money to work with spend a higher proportion of their income on energy.

This paper reaches the same conclusion. Similar to the October 2018 study commissioned by IER, it also finds that different revenue-recycling strategies (i.e., ways of spending of the tax revenue) yield different results. As is typical, this paper finds that so-called rebates (wealth transfers) can be used to nullify the regressive effect of the tax. This consideration, however, comes at the expense of revenue-recycling strategies that might have less distortionary overall effects, such as corporate income tax reduction.

To be clear, IER is skeptical of the approach, broadly speaking, that papers such as this one take to addressing political issues, but we also recognize that to the extent that mainstream commentators embrace this approach, the clear tension between distributional concerns and economic efficiency demonstrates the weakness of the case for a carbon tax.

What about the children?
NBER, April 2019 working paper:

Carbon taxation has been studied primarily in social planner or infinitely lived agent models, which trade off the welfare of future and current generations…Sharing efficiency gains evenly requires, however, taxing future generations by as much as 8.1 percent and subsidizing early generations by as much as 1.2 percent of lifetime consumption.

Without such redistribution (the Nordhaus “optimum”), the carbon tax constitutes a win-lose policy with current generations experiencing an up to 0.84 percent welfare loss and future generations experiencing an up to 7.54 percent welfare gain. With a six-times larger damage function, the optimal UWI initial carbon tax is $70, again rising annually at 1.5 percent. This policy raises all generations’ welfare by almost 5 percent. However, doing so requires levying taxes on and giving transfers to future and current generations ranging up to 50.1 percent and 10.3 percent of their lifetime consumption. Delaying carbon policy, for 20 years, reduces efficiency gains roughly in half.

IER’s Take
In this recent post for IER, economist Robert Murphy explains the Kotlikoff and Sachs paper in terms the layman can understand. The upshot is that the alleged benefits from a carbon tax’s emissions reductions would not accrue until three generations into the future. Here’s Dr. Murphy’s central argument:

In practice, the authors point out, Nordhaus’ “optimal carbon tax” would actually mean that people living or born today and in the near future will be harmed on net by the policy, because they will suffer worse economic harm from higher energy prices, than they will be spared in climate change damages from reduced emissions. It’s only when we get several generations into the future, that Nordhaus’ “optimal carbon tax” actually starts making human beings better off, compared to the status quo.

This is a critical point for Americans to realize. They are constantly being hectored that if they “cared for their children” they would support a large carbon tax and other aggressive interventions. But we see that this isn’t true: If we even adopt a modest carbon tax—one that still allows 4 degrees Celsius warming (over twice the 1.5 degree currently touted by climate activists as the necessary target), according to the authors—then we are harming ourselves, our children, and our grandchildren, relative to the “do nothing” baseline. It’s only our great-grandchildren, who (on average) are going to be fantastically wealthy compared to us, who will actually start reaping net benefits from even this modest reduction in the path of emissions.

Where do we stand?
E&E News, June 2019 feature:

If carbon taxes had a godmother, her name might be Adele Morris.

The Princeton University-educated economist has worked on the issue of climate change for more than two decades — both inside and outside the government — and much of that time has been consumed by the wonkiest of possible responses: carbon pricing…”I think the idea of carbon pricing is really gaining,” she said. “It’s being incorporated into the discussion of what needs to be done, and I think that’s progress.”

There was optimism among some advocates that Republicans might be convinced to move toward carbon taxes in response to the Green New Deal. But so far there’s been little evidence of much movement, as the Republicans who do talk about climate change recently have touted investment in carbon-fighting technologies, such as carbon capture.

“We believe that the key to successfully tackling climate change is American innovation,” Rep. Kevin Brady (R-Texas) said at a recent hearing of the House Ways and Means Committee. He added, “We believe a carbon tax is not the solution to address our environmental challenges.”

Some Democrats, too, have dialed back their enthusiasm. After campaigning hard on carbon taxes in 2016, Sen. Bernie Sanders (I-Vt.) has adjusted his message for his 2020 presidential run to focus more on the Green New Deal. Nor is he alone. With a few exceptions, the 2020 Democratic candidates for president are much more likely to talk about the Paris climate accord or the Green New Deal than carbon taxes.

IER’s Take

As I’ve remarked upon before, the carbon tax is not the bipartisan salve some centrists so desperately wish it to be. Democrats have lurched to the left and as a result the carbon tax has ceded ground to even more intrusive policies aimed at curbing emissions. The remaining coalition in favor of the carbon tax remains prominent in the public discourse—see, Dr. Morris—but less so in electoral politics.

From my vantage point, there is no path to a federal carbon tax in the near term. What remains threatening to free markets in energy, however, is the ambiguous, widespread Republican endorsement of “technology” and “innovation” as a response to public pressure on climate. All too often, politicians’ narrow conception of those terms leads to the ill-conceived shoveling of taxpayer dollars into politically-favored enterprises. The rejection of a carbon tax by the overwhelming majority of Republicans does not mean we are safe from destructive climate change policies.

*Text excerpted from October 2018 working paper

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