A recent article in E&E (Nathaniel Gronewold, “Can a carbon tax replace cap and trade?”, 11/22) demonstrates that although cap-and-trade may be dead, its spirit lives on in the minds of its believers:
The midterm election results have given activists a two-year timeout to rethink, regroup, and come up with a new strategy for pushing the government to tackle climate change. That new strategy should abandon Wall Street’s preferred cap-and-trade method in favor of some type of carbon tax that returns money to households, movement leaders are now saying.
They find themselves in this new difficult position because absolutely nothing will happen in Congress once Republicans regain control of the House next year and expand their numbers in the Senate. And the election and the emergence of the tea party movement mean previous climate change bills are now history and gridlock will be the order of the day in Washington, at least until the next midterm vote in 2012.
That’s the message four congressmen and pro-climate action experts gave to an audience still reeling from the election results of three weeks ago, which saw climate change skeptics do well while some proponents of curbing greenhouse gases were voted out of office.
Those who believe that a cap-and-trade program would prove economically destructive—while doing little if anything to benefit future generations in terms of climate—should not assume that a carbon tax will be politically impossible in the future.
For one thing, government at all levels will likely continue to suffer recurring fiscal crises over the next several years. The Social Security system is already sending out more in benefits checks, than it is collecting from workers. If unemployment remains high, the Social Security system might never return to the black. Starved for revenue, and threatening major cuts in entitlements, the government might cast a carbon tax as a “win-win” for the public.
Furthermore, the battle over cap-and-trade may have erroneously led even free-market economists to believe that an explicit carbon tax carried few disadvantages. For example, critics of cap-and-trade focused (justifiably so) on the fact that it would redistribute wealth into the pockets of wealthy insiders. Since an explicit carbon tax would have visible revenue streams, some analysts might conclude that it is an “efficient” way to deal with climate change and budget deficits at the same time.
A Real-World Carbon Tax Will Be Economically Destructive
Even though it doesn’t give the same opportunity for backdoor subsidies as cap-and-trade did, a carbon tax is still very dangerous. In a 2009 peer-reviewed article in The Independent Review, I analyzed one of the leading models of the global economy and climate. The model was developed by William Nordhaus, who is a proponent of carbon taxes.
Nonetheless, Nordhaus showed that once we leave the textbook world of “optimal” carbon taxes implemented faithfully across the world, then the case for such government intervention becomes far weaker. For example, Nordhaus’ model reveals that if only half of the world’s emissions are subject to the “optimal” tax regime, then the economic sacrifice necessary to achieve a given environmental objective will be 250 percent higher.
Even worse, if the politicians impose too stringent a limit—i.e. set the carbon tax too high—then the economic costs far outweigh the environmental gains, and this is true even in the model. For the most extreme example, Nordhaus’ model shows that an “optimal” tax would yield the world net benefits of about $3 trillion. (The economy would forfeit $2 trillion in output because of the tax, but the reduced emissions would avert $5 trillion in climate change damages.)
But instead of the theoretically optimum tax, what if the government instead implemented a carbon tax to achieve Al Gore’s proposal of a 90 percent emissions reduction? In that case, the world would suffer net costs of $21 trillion. Yes, $12 trillion of climate change damages would be averted, but this would be swamped by about $34 trillion in economic costs due to the draconian carbon tax necessary to achieve such a huge curtailment in emissions.
Even though cap-and-trade may be dead for the foreseeable future, its proponents are apparently regrouping in order to push through an explicit carbon tax. But even a leading model developed by a proponent of carbon taxes, shows that an aggressive tax poses far greater risks to humans than a warming climate.