There is a small but vocal group who persistently tell conservatives that they should support a carbon tax. One of their chief arguments is that carbon tax receipts could be used to offset other taxes and thereby boost conventional economic growth—I’ve devoted an entire study to debunking that particular claim. Another common argument in this genre is that a carbon tax would take other interventions “off the table” and at least provide a “market solution” to climate change. I’ll walk through a recent Paul Krugman blog post to show just how ludicrous this hope is.
The context was a Roger Pielke Jr. letter to the FT about the futility of government caps on emissions. Besides simply inventing positions and attributing them to Pielke, Krugman gave his readers a quick lesson in how government policies can influence people’s energy choices. Yet let’s focus on a throw-away line from Krugman that is quite relevant to the broader debate:
Take, as an example we’re all familiar with, auto emissions. In a wealthy economy, people will want to move around. But some of them might use public transit if the price and quality is right; they could drive fuel-efficient cars rather than big SUVs; they could use diesel, or hybrid vehicles. All these choices would impose some cost, and reduce real income to some extent….
As it happens, by the way, the Obama administration’s tightening of fuel economy standards is by some measures as important a move as its power-plant regulations.
If you follow Krugman’s link, you’ll get a ThinkProgress analysis claiming that the Obama CAFE rules are (in Krugman’s view) “as important a move” as the proposed power plant regulations, according to the criterion of the total reduction in emissions. There is not a single sentence devoted to marginal analysis, to ask the question, “How much does it cost in terms of the conventional economy, in order to achieve these putative environmental benefits?”
It’s understandable that a climate scientist, let alone the average Greenpeace supporter, might not “think like an economist” about climate change issues. But surely a Nobel Prize-winning economist should, right? And yet Krugman just matter-of-factly judges policies based on how much they clamp down on emissions, with nary a word to his readers about the economic analysis of such things.
This is quite a surprising move in the case of fuel economy (CAFE) standards. Even economists who support government policies to reduce emissions agree that tightening CAFE regulations are an incredibly costly way to tackle climate change. For example, this 2013 Energy Economics article estimates that “a fuel economy standard is shown to be at least six to fourteen times less cost effective than a price instrument (fuel tax) when targeting an identical reduction in cumulative gasoline use.”
For another example, this 2006 article from Resources for the Future (an outfit that supports government policies to restrict carbon dioxide emissions) discusses several “externalities” associated with driving, such as climate change, traffic accidents, and conventional air pollution. The article then looked at various instruments to address these alleged problems, including fuel taxes and tighter CAFE standards. Here’s what the article had to say about the latter:
Raising CAFE standards actually may increase the (net) costs of highway externalities…even though higher fuel taxes would decrease them.
…In contrast [to fuel taxes], higher fuel economy standards actually increase, rather than reduce, VMT [vehicle-miles traveled] as they lower fuel costs per mile driven, though the increase in VMT is modest. Nonetheless, the impact of tightening CAFE could be to increase external costs overall…
Even taking the conventional climate-change “negative externality” argument at face value, there are several reasons that top-down mandates on vehicle fuel economy are an incredibly inefficient way to address the issue.
First of all, by making vehicles more fuel-efficient, the standards make it cheaper to drive an additional mile. This is related to the so-called Jevons’ Paradox, which states the possibility that as energy efficiency improves, total energy consumption can increase. In other words, just because vehicles become more fuel-efficient, it doesn’t mean Americans will burn fewer gallons of gasoline; it depends on how much total driving increases, because of the lower costs of driving.
Second, even if we just look at vehicle fuel economy, the worst “gas guzzlers” are older vehicles on the road. If we’re going to implement a top-down attack on fuel inefficiency, then it would make more sense to go after those vehicles, rather than polishing the edges of newer vehicle designs that are already going to be relatively efficient. In addition to attacking the relatively benign offenders—i.e. brand-new vehicle models that already would have incorporated cutting-edge technology—the CAFE approach leads to lighter vehicle design which results in more traffic fatalities. In other words, people are literally dying because of these regulations.
Finally, given a climate objective of reducing emissions by a specified amount, it is ludicrous to suppose that the “optimal” response would be to focus the reductions on specific sectors, such as “emissions from newly manufactured vehicles” or “emissions from US power plants.” Indeed, the whole point about a carbon tax (or cap-and-trade) system being “market solutions” is that government officials don’t know the cheapest areas—the low-hanging fruit as it were—to grab emissions reductions. That’s why top-down, command-and-control approaches are so costly, even if we accept for the sake of argument that the government must “do something” to achieve emissions reductions.
Yet in spite of all of the above, notice that Krugman the Nobel laureate doesn’t mention any of it. He is totally on board with the Obama Administration’s CAFE standards and proposed power plant regulations. Regarding the EPA’s latest, Krugman isn’t even holding his nose and supporting a horribly inefficient policy because “Republicans killed a carbon tax.” No, even after reading the US Chamber’s report, Krugman proudly told his readers how cheap the EPA regs would be.
This all confirms Marlo Lewis’ thoughts about offering the Left a carbon tax in the hope that they would then agree to scrap all of the other climate-change interventions. Here’s Lewis:
Neither the carbon tax bill sponsored by Sens. Barbara Boxer (D-Calif.) and Bernie Sanders (I.-Vt.) nor that sponsored by Rep. Henry Waxman (D-Calif.) and Sen. Sheldon Whitehouse (D-R.I.) would remove one iota of the EPA’s authority to regulate greenhouse gases. Instead, Boxer-Sanders would impose new EPA regulations on hydraulic fracturing. Waxman-Whitehouse preemptively safeguards EPA’s regulatory turf, stating: “Nothing in this Act shall affect the application of any other provision of law to a covered entity, or the responsibility for a covered entity to comply with any such provision of law.” California Democrats last month rejected a plan to replace the State’s cap-and-trade program with a carbon tax.
Let’s get real. When was the last time you heard the Sierra Club, NRDC, Bill McKibben, or Gina McCarthy say that Massachusetts v. EPA, EPA’s greenhouse gas regulations, the Renewable Fuel Standard, new-car fuel economy standards, DOE energy efficiency standards, the incandescent light bulb ban, Stimulus subsidies for Solyndra, and the proliferation of state-level renewable energy quota were all just a strategy to put conservatives over a barrel so we’d finally ask for a carbon tax to make those regulations, mandates, and subsidies go away?
If a Nobel economics laureate like Paul Krugman can throw marginal cost/benefit analysis out the window—and even refer non-ironically to “saving the planet” when he discusses climate change policies—do we expect non-economist progressives to do better? Conservatives and libertarians should not fool themselves. Any “bargain” of accepting a carbon tax in order to get rid of other interventions would end up looking like Lando Calrissian’s deal with Darth Vader.