In a recent Wall Street Journal article, Holman W. Jenkins, Jr. understandably excoriated the CNN climate change town hall, featuring Democratic presidential contenders. As Jenkins noted, the candidates and moderator focused on unscientific scare tactics that would cause the American public to tune out. However, Jenkins then lamented that the Democatic/CNN alarmism was defusing support for a “sensible” policy, namely a carbon tax. In this post I’ll explain why Jenkins’ arguments for a carbon tax don’t work, as any conservative or libertarian should realize.
Jenkins’ Case for a Carbon Tax
Let me first quote Jenkins in his own words:
[The CNN town hall] comes just days after the shocking suicide of Harvard climate economist Martin Weitzman, rightly praised in obituaries for an insight lacking in the CNN town hall: A climate disaster is far from guaranteed. It’s the low but not insignificant chance of a “fat tail” worst-case disaster that we should worry about. (Mr. Weitzman put the odds at 3% to 10%.)
As the New York Times also noted, “For the first time, Ms. Warren explicitly embraced a carbon tax before quickly pivoting away . . .”
What’s Ms. Warren afraid of? A carbon tax would hardly be prohibitive. Weitzman advocated $40 a ton—the equivalent of 36 cents per gallon of gasoline. Such a tax could be implemented without raising the overall tax burden; it could be used to trim taxes on work, saving and investment, improving the economy overall. It could be embraced and copied by other nations out of self-interest rather than self-abnegation (unlike the absurd Green New Deal).
Jenkins believes he is offering a perfectly reasonable proposal of a modest carbon tax, that won’t hurt the economy (if done right) and could significantly reduce the chance of a global catastrophe. What’s not to like?
Weitzman’s “Fat Tails” Argument Can Justify Anything
First let’s address Jenkins’ citation of the recently (and tragically) deceased Martin Weitzman. As Jenkins admits, the argument over climate change policy is no longer about a looming disaster that a carbon tax (and other measures) are necessary to avert, where the “consensus science” makes it a slam dunk and only “deniers” could have problems with it.
No, now the cutting edge of the debate is between people who are looking at what will probably happen, versus worst-case analysts who keep bringing up what might happen. Martin Weitzman’s highly technical work showed conditions of uncertainty under which standard cost/benefit analysis breaks down, mathematically, and so we can’t just implement policies that make sense “on average.” Indeed, it is now commonplace in the literature to refer to a carbon tax and other mitigation policies as “insurance,” because they might not make economic sense in most cases, but there’s a small probability that they will stave off disaster.
Now the thing about an insurance policy is that you never know if it makes sense, at least just looking at one particular case. For example, if you spend decades paying for fire insurance on your house, and your house never burns down, that doesn’t mean you were a sucker.
So right off the bat, if we are now justifying a carbon tax on the basis of a “fat tail” in the probability distribution of potential catastrophes, then there is no way to ever get rid of it. As last year’s Nobel laureate for his work in climate economics, William Nordhaus, explained in his 2009 critique of Weitzman:
The CRRA [constant relative risk aversion] functions that Weitzman analyzes (with α>1) assume that zero consumption has utility of minus negative infinity (and unbounded positive marginal utility) as consumption goes to zero. This has the unattractive and unrealistic feature that societies would pay unlimited amounts to prevent an infinitesimal probability of zero consumption. For example, assume that there is a very, very tiny probability that a killer asteroid might hit Earth, and further assume that we can deflect that asteroid for an expenditure of $10 trillion. The CRRA utility function implies that we would spend the $10 trillion no matter how small was the probability. Even if the probability were 10-10, 10-20, or even 10-1,000,000, we would spend a large fraction of world income to avoid these infinitesimally small outcomes (short of going extinct to prevent extinction).
An alternative would be to assume that near-zero consumption is extremely but not infinitely undesirable. This is analogous in the health literature to assuming that the value of avoiding an individual’s statistical death is finite. To be realistic, societies tolerate a tiny probability of zero consumption if preventing zero consumption is ruinously expensive. [William Nordhaus, bold added.]
Now to be fair, Weitzman responded to Nordhaus, offering reasons that he thought climate change was more important as a “fat tails” issue than some other hypothetical possibilities (killer AI, super viruses, etc.).
Even so, in terms of the rhetoric of his argument, Nordhaus’ point remains: If you’re going to say that a certain catastrophe is unacceptable so that standard cost/benefit analysis leads to the wrong answer mathematically—because you’re multiplying a low probability by a “negative infinity” value of the outcome—then you could do that with just about anything. Just as guys like me can’t prove that humanity won’t suffer from a collapsing ice sheet, likewise we can’t prove that humanity won’t be destroyed by an asteroid or aliens or killer bees for that matter. It’s no use to apply a “rational” assessment of the pros and cons of spending trillions on these issues, because after all, the whole point of Weitzman’s analysis is that such bean counting doesn’t apply in these cases.
Jenkins Ignores History
Besides opening Pandora’s Box with his nod to Weitzman’s work, Jenkins also displays remarkable naiveté when he matter-of-factly says that a “modest” carbon tax could be implemented in such a way as to improve “the economy overall.”
As I’ve argued repeatedly here at IER, even on paper the theoretical case for a “win-win” with a revenue-neutral carbon tax is quite a knife-edge result. It’s not merely that political officials have to watch all those hundreds of billions in carbon tax revenue float by, without increasing spending. On top of that, they have to make sure that the dollar-for-dollar offsetting tax cuts consist largely of reductions in corporate income tax cuts. If instead they were to devote the carbon tax receipts to lump-sum rebates—which is the plan that “conservative Republicans” like Bob Inglis support—then standard modeling in the literature shows that the economy will be hurt by a carbon tax, because of the “tax interaction effect.”
In any event, Jenkins is ignoring history. As I explain in this IER study, when the modern federal income tax was first introduced, it was sold as a fair and efficient way to reduce the burden of tariffs. In 1913, the top federal marginal income tax rate was 7%, but by 1918—just five years later—it was 77%, because of World War I. And of course, Americans got smacked with tariffs too, under the Hoover Administration in the early 1930s.
Does Jenkins really believe that we can trust the political process this time around?
As a regular contributor to the Wall Street Journal, Holman W. Jenkins, Jr. rightfully mocks the anti-scientific virtue signaling on display at the CNN town hall on climate change. But his own advocacy of a carbon tax itself is naïve, reflecting a lack of historical awareness and an appreciation of what his arguments would justify down the road.