In a comment on Bryan Caplan’s latest post, “Climate Shock Bet: Daniel Reeves Responds,” November 10, 2021, co-blogger Scott Sumner writes:
Revenue neutral carbon taxes are a low hanging fruit that we have foolishly declared impractical.
Are they really low-hanging fruit? It’s not that clear. I wrote about this in “A Case Against the Carbon Tax For All Ideologies,” July 28, 2018. The gist of my argument is this:
If it turns out that the most efficient way to deal with global warming is a carbon tax, then, yes, the carbon tax is the best way to deal with global warming. But we don’t know that the most efficient way to deal with global warming is with a carbon tax. All we know is that the most efficient way to reduce carbon usage is with a carbon tax.
But there are other alternatives for dealing with global warming that don’t involve reducing carbon usage. Most geo-engineering solutions are in this category.
Take an extreme case. Let’s say that using the Nordhaus model, you conclude that the optimal carbon tax, given that your goal is to reduce carbon usage, is $40 per ton. This will cost hundreds of billions of dollars and even trillions of dollars over years. But what if a geo-engineering solution that doesn’t involve reducing carbon costs only $1 billion. You can’t argue that the carbon tax would reward the person or company–I’m looking at you, Nathan Myrhvold–that produces this solution. The reason: the geo-engineering solution didn’t reduce carbon one iota. So we will have chosen a very expensive solution when a cheaper one was available.
In that case, the carbon tax is not low-hanging fruit at all.
Now you might argue that there’s no harm done because a carbon tax could replace other taxes that cause even more deadweight loss. That could be true. But if you look at the various proposals, the most likely is a carbon tax that simply gives a rebate per family. So there is no reduction in deadweight loss.
You also might argue that there is no harm done by a carbon tax because it’s internalizing an externality. But if you argue this, you’re begging the question. When we as economists observe an externality, we want the least-cost solution and that is not necessarily a tax solution.
READER COMMENTS
Andrew_FL
Nov 10 2021 at 2:06pm
I am not willing to concede that social cost is calculable, much less known by government bureaucrats. If individuals suffer damages, let them prove it in court.
Mark Z
Nov 10 2021 at 3:36pm
This doesn’t work when the damages are so dispersed that it’s not worth it to use the courts. If every day, almost everyone in America does something that costs me a minute fraction of a cent, and I do things that cost everyone else a minute fraction of a cent, what are we supposed to do? Everyone can be constantly suing everyone else for fractions of cents? It’s basically a problem of transaction costs. The cost of mediating the dispute between any two parties is much greater than the value of what’s at stake in each individual dispute over CO2 damages, even though the totality of damages done by and to everyone is significant.
Andrew_FL
Nov 10 2021 at 4:12pm
All I hear you saying is that you can’t prove more than negligible damages from climate change
Mark Z
Nov 10 2021 at 4:51pm
Well there’s nothing I can do to improve your reading comprehension.
Philo
Nov 10 2021 at 8:19pm
If each of, say, eight billion people suffers, say, one dollar of damage per year–too small for any of them to sue over–the total cost per year is substantial, not to be dismissed.
By the way, the primary concern of climate hawks is not damage to presently existing people, but “damage” to people who do not yet exist–to presumptive future people. Since these “people” do not have legal standing, this is not the sort of concern that can be handled by the courts.
Andrew_FL
Nov 10 2021 at 10:49pm
Eight billion dollars a year is less than .01% of Gross World Product, it’s not significant at all.
Jon Murphy
Nov 11 2021 at 7:48am
Do not be so quick to dismiss small individual costs that add us to large social costs.
Remember that a cost is also a profit opportunity for anyone who can reduce the cost. Many people have gotten fabulously wealthy by alleviating these “negligible” costs: Jeff Bezos, Sam Walton, Dollar Store family, etc.
Now, for the reason I just stated one can be doubtful that government action like a carbon tax would be a net benefit. But it is a mistake to glibly dismiss marginal thinking, Andrew_FL.
Andrew_FL
Nov 11 2021 at 3:41pm
I don’t dismiss marginal thinking. I dismiss aggregate thinking.
Jon Murphy
Nov 11 2021 at 6:37pm
In this case, you dismiss both. Acting on the margin effects the aggregate. Thus, by dismissing marginal costs to individuals as “negligible” you are also downplaying the total costs. Fortunately, we have entrepreneurs who do not make the same mistake.
robc
Nov 10 2021 at 4:12pm
Isn’t that exactly why class action lawsuits exist?
AMT
Nov 10 2021 at 7:36pm
No, that’s extraordinarily false. It couldn’t work when it is literally “Every person in the world v. Every person in the world.” It doesn’t work when there are many plaintiffs AND many defendants, not to mention each plaintiff is suing literally everyone else in the world except themself. It’s actually logically impossible to find either an attorney or judge who wouldn’t be barred from participating based on conflicts of interest…
Andrew_FL
Nov 10 2021 at 7:56pm
If there are no third parties, there is no externality.
AMT
Nov 10 2021 at 9:14pm
lol. nice try Andy
Stéphane Couvreur
Nov 10 2021 at 2:12pm
Everyone keeps talking about a carbon tax as if it were the first best economic policy? Doesn’t this palm go to carbon quotas, a carbon tax being the second choice (even if it is allegedly compensated by tax reductions elsewhere)? They are less distortive, seem to have advantages from a public choice perspective, so they guarantee that the desired emissions will not be exceeded at a lower cost. Plus, they have the advantage of not containing the word “tax”…
What am I missing?
Frank
Nov 10 2021 at 3:00pm
For every tax a quota can be found, and for every quota can be found.
I have the impression that quota laws can be gamed more easily than tax laws, which is another reason the tax version is less popular.
Frank
Nov 10 2021 at 2:58pm
“But if you look at the various proposals, the most likely is a carbon tax that simply gives a rebate per family. So there is no reduction in deadweight loss.”
The carbon tax eliminates a deadweight loss caused by the undercharging for carbon. The rebate negates the income effect of the tax but not the substitution effect.
Also, parking would get easier! 🙂
David Henderson
Nov 10 2021 at 3:14pm
Frank, You did exactly what I warned about in my last paragraph: You begged the question. If a carbon tax is not the least-cost solution to global warming and if a geo-engineering solution that doesn’t involve reduction of carbon is, then there is no undercharging for carbon.
Frank
Nov 10 2021 at 4:20pm
The carbon tax will provide the incentive to try out and use geo-engineering, should it prove cost effective.
I wouldn’t push geo-engineering in advance. Should geo-engineering prove cost effective the tax can be avoided.
In the absence of the tax, the geo’s just want government money. In the presence of the tax, large carbon emitters, together or separately, have the incentive to pay for experiments with geo.
If geo failed, we’d still have the tax to take care of things.
David Henderson
Nov 10 2021 at 6:28pm
Frank,
You wrote:
No it won’t. It doesn’t give anyone an incentive to do the kind of geo-engineering that doesn’t involve carbon reduction. You come up with a low-cost geo-engineering solution. It works. How do you get reimbursed by a carbon tax? Alternatively, how do you save on paying carbon taxes, given that you’re not using any less carbon?
Frank
Nov 10 2021 at 9:01pm
Well, yeah, allowing geo to count against carbon emissions for tax purposes would have to be an explicit government policy.
But no worries, neither geo nor a carbon tax will become real anytime soon, and I’m not worried about it.
Thomas Lee Hutcheson
Nov 10 2021 at 3:18pm
Well you may “suppose” that geoengineering would produce the same reduction in losses as reducing CO2 concentrations in the atmosphere at less cost, but given what we know right now (I agree we ought to be experimenting to find out more and modeling one vs the other) it does not seem likely. Also there seems to be an assumption here that the deadweight losses of taxing net CO2 emissions would be high. I’m enough of a technological optimist to think the would not be.
Mark Z
Nov 10 2021 at 3:28pm
Couldn’t one resolve this problem simply by using the tax revenue generated from the carbon tax to subsidize carbon removal (most geoengineering solutions involve carbon removal)? If it’s cheaper to sequester X amount of carbon than it is for a company to avoid emitting X amount of carbon, the company could emit the carbon, then pay a carbon sequestration firm to remove the same amount of carbon, and the subsidy for removing it would cancel out the tax for emitting it.
David Henderson
Nov 10 2021 at 3:34pm
That would work if the least-cost geo-engineering solution involved carbon removal. There’s a good chance that it doesn’t.
Airman Spry Shark
Nov 10 2021 at 5:12pm
Completely separately from the effects on global temperature, increased atmospheric carbon dioxide decreases the pH of open water. While there may be geoengineering approaches that could lower global temperatures without reducing the quantity of carbon dioxide in the atmosphere, they would not address ocean acidification. That may contribute to the persistent disconnection between you & your interlocuters on the topic of carbon taxes.
Matthias
Nov 11 2021 at 11:19am
You could drop some base like eg lime in the ocean to correct the pH? (If you are willing to do geo engineering.)
Or you could cburn the oceans somehow. The amount of CO2 is trivial compared to the whole ocean, the problem is that all the new CO2 makes the upper most layers acidic.
Of course, neither of these solutions might work. But I think David’s point is that we don’t know this without more domain expertise.
Bill Conerly
Nov 10 2021 at 3:36pm
To address a revenue-neutral carbon tax, we should consider whether a carbon tax is worse than an income tax (or payroll tax or corporate profits tax or liquor tax). Dave, are you claiming that the income tax has better consequences than a carbon tax?
robc
Nov 10 2021 at 4:15pm
He covered that:
David Henderson
Nov 10 2021 at 6:29pm
What robc said. The best shot for using the carbon tax revenues to reduce the deadweight loss from other taxes is to drastically cut and maybe end the corporate income tax. What do you think the odds are of doing that?
Mark Barbieri
Nov 10 2021 at 5:27pm
I don’t think many people are serious about doing anything significant about climate change.
Carbon tax? The President is jawboning OPEC to lower rather than raise the price of oil. All I ever see are people talking about how other people should change their behavior to address climate change but few people are stepping up to put the burden on themselves or on the broader population. When I start seeing people say that they don’t travel anymore because of climate change, I’ll believe that something might happen. Until then, I enjoy the discussions over what the most efficient approaches are, but I’m not under any illusion that we’ll take them.
Phil H
Nov 10 2021 at 7:24pm
I have a vague memory that a few years ago someone (unknown) did an experiment dropping a shipful of iron filings into the sea. The idea was to stimulate algae growth, which would photosynthesise more CO2 out of the air. Does anyone know if that was followed up or tracked?
Phil H
Nov 10 2021 at 7:36pm
Found it: Russ George, off Canada. No good scientific follow up. Seems like a waste of an opportunity.
Don Boudreaux
Nov 11 2021 at 8:29am
David:
Excellent post. Coase would nod approvingly!
One alternative – not to say better – way of doing what I take you here to be doing is to ask this question: How do we know that we’re not already taxing carbon optimally, or perhaps even super-optimally? There are currently in place taxes – in the U.S. and elsewhere – on carbon fuels (and on activities that emit carbon). The fact that carbon continues to be emitted, and the fact that these emissions plausibly generate “costs,” does not imply that carbon emissions today are excessive.
The gains from using carbon fuels are real, and it’s practically impossible to calculate the additional costs that would result from any government-engineered further reduction in carbon emissions. The economy is too complex, and human ingenuity is too great, to permit any such calculation that would be remotely accurate. We simply don’t know and cannot know, what we’ll give up by any further hike in carbon taxes.
Likewise, we simply don’t know, and cannot know, what we’ve given up so far as a result of the existing taxes on carbon and carbon-emitting activities.
Finally (and to your very point), we simply don’t know, and cannot know, what processes, devices, or institutions human ingenuity will come up with – or, more generally, what new opportunities will unfold – in the future. It very well might be the case that a lowering of carbon taxes – say, by unleashing a bit more economic development – would do more to protect the environment and human health and well-being than would any increase in carbon taxes.
Of course, the opposite might also be true – namely, that a raising of carbon taxes would prompt reactions that generate net human betterment. But this latter possibility is, by nearly all carbon-tax proponents, simply assumed to be true. These proponents do not realize the extreme tenuousness of their assumption.
Zeke5123
Nov 11 2021 at 8:38am
I was going to bring up Coase and the Problem of Social Costs. What I struggle with here is who has the property right? I guess implicitly the polluters have the right. The other issue is can you meaningfully negotiate in this context.
Don Boudreaux
Nov 11 2021 at 9:19am
Zeke5123:
Negotiation among many people is indeed impractical. But it’s important to keep in mind a feature of Coase’s work that most people overlook – namely, the bilateralness of externalities. The amount of harm that party A ’causes’ to party B is a function not only of party A’s actions (or inactions) but, necessarily, also of party B’s actions (or inactions). Just as it takes two to tango, it takes (at least) two to externality. (I put ’causes’ in scare-quote-marks because, if indeed the low-cost avoider is party B, then the party that is appropriately described as “causing” the harm is not party A but, instead, party B.)
Coase himself, and understandably, complained often that people overlook this most important part of his analysis.
And so the importance of Coase doesn’t disappear or become neutered if negotiations are impractical – that is, if transaction costs are too high to permit the creation and enforcement of property rights and any resulting negotiations among rights holders. Even with unclear property rights and negotiations being impractical, there remains the question: Which of the parties is the lowest-cost avoider of the harm? Maybe it’s the carbon emitters – or maybe it’s some other party. Simply observing that (1) fossil-fuel-burning power sources emit carbon; (2) such emissions contribute to a greenhouse effect; and (3) left unabated and un-adjusted-to, the greenhouse effect will harm humanity, is insufficient to justify imposing carbon taxes or quotas on carbon emissions.
Jon Murphy
Nov 11 2021 at 10:43am
If I may make a shameless self-plug, Dr. John Schuler (a GMU alum) and I wrote a short piece for Econlib on this very point. We use an example from the old TV show “Have Gun – Will Travel” and discuss how the lowest-cost avoider in that case was not the polluter but rather the one affected by the pollution! In the absence of property rights, a carbon tax would have been inefficient; the burden would have been placed on the incorrect party.
David Seltzer is
Nov 11 2021 at 4:30pm
Jon, given the Coasean bilateralness of externalities, wouldn’t the best outcome…optimal…be where the lowest marginal cost to both parties equals the marginal benefit to both parties. This might be achieved with more nuclear power plants, even with the draconian regulations that slow new construction.
Zeke5123
Nov 12 2021 at 4:45pm
Thanks for the response (and the post on CafeHayek).
I get the bilateral point (thought you explained it well when you spoke with Russ Roberts re covid).
I guess my concern is that if the least cost avoider has no incentive to avoid the harm and transaction costs are set too high, then you may end up in a sub optimal position. Of course, the same is true if the government sets the property right in the other direction and transaction costs are too high.
Key to me seems to be decreasing transaction costs but that’s harder.
Rob Rawlings
Nov 11 2021 at 10:19am
‘Simply observing that (1) fossil-fuel-burning power sources emit carbon; (2) such emissions contribute to a greenhouse effect; and (3) left unabated and un-adjusted-to, the greenhouse effect will harm humanity, is insufficient to justify imposing carbon taxes’
Those 3 conditions appear to describe a situation where carbon production does have some non-internalized costs so it would justify a carbon tax. However this might not be the lowest cost solution that would be arrived at if transaction costs were much lower.
Most geo-engineering solutions seem unproven and distant at the moment (I hope this changes) so I can’t help but agree with Scott Sumner that a carbon tax does seem like a low-hanging fruit right now compared to other options.
Vangel Vesovski
Nov 11 2021 at 12:20pm
How is humanity or the biosphere harmed by seeing the average temperature go up? Note that if we look at the AGW hypothesis, most of the warming sill come from higher minimums, mostly in high latitude areas. Given that severe weather is driven by differences in energy, that would mean a warmer and more benign environment. Given that it would also mean longer growing seasons, food poverty would go down. So would the need for heating homes 24/7 during cold winters which are responsible for greater mortality than hot summers. We know from observation that higher temperatures mean greater biodiversity. Why is that a bad thing?
After I got married I decided to follow up on what I discovered at the Banpo site outside of Xi’an. My wife and I took a trip into the Tarim basin and looked at the old Silk Road dead cities and the famous mummies. The cities were bleak. The clay structures stood up over the thousands of years that made them uninhabitable. But you could not live in them because the daytime surface temperatures approach 50C. It was amusing to see tourists run out with shoes that were essentially falling apart because of the heat or see a local break an egg on a rock and see it cook. Yet, during the period when it was 3C warmer on average the cities were inhabited. The guides were clear. Warmer meant more rainfall and more plants growing in the area. It meant much warmer nights that were comfortable when accounting for the huge mass of clay, sand and wood binder that absorbed the heat of the day and released it at night. Being clever people the inhabitants used simple l0w-tech methods to maintain a comfortable interior environment.
Note that the warmer average temperatures were not as much of a problem as the cooler temperatures today. Those temperatures made it possible for people to travel long differences. The mummies were not Han Chinese. In fact, while some were likely from Central Asia some of them looked to have Northern European features. One day the genetic testing will be done and we will have a better idea. But we still know that the bleak region that we see today used to be thriving when temperatures were higher.
I am reluctant to buy into the AGW nonsense because there is no objective evidence to support the claims. Governments have spent several hundred billion dollars but are still justifying claims on the basis of failed computer models and ‘expert judgment’. I am not willing to give them the benefit of doubt and support any taxes.
William Shughart
Nov 11 2021 at 10:51am
No selective tax sticks where it lands. Tax burdens are shifted forward and backward (the extent to which depends on the elasticities of supply and demand at each stage of the production process). So, even if an “optimal” carbon tax rate could be computed (doubtful after being filtered through the political process), how the burden actually will be shared between consumers and the suppliers of inputs, including capital, is about as murky as who bears the burden of the corporate income tax.
Dallas Weaver Ph.D.
Nov 11 2021 at 1:06pm
Carbon taxes are the only rational way to handle the carbon-dioxide issue.
The geoengineering solutions may handle the average temperature issue, but would also change the distribution of weather with rather unknown impacts on specific areas. The higher CO2 would still decrease the pH of waters and the use of H2SO4 (adding sulfur) to the atmosphere for the cooling impact will compound the acid rain and decrease pH issues. The decreased pH can impact corals and shellfish (pure physical chemistry with no debate).
A social cost of carbon in the < $100/ton range revenue-neutral tax, either decreasing a know detrimental tax like payroll tax or just payment to the citizens would be a net economic stimulus and very progressive.
Anyone who claims to be worried/concerned about climate change who isn’t pushing a carbon tax, in one form or another, is really pushing another agenda. Most of the activist organizations like the Sierra Club who are against carbon taxes have a real agenda like increasing power and control that is hidden.
BS
Nov 11 2021 at 1:42pm
From where does this faith that “oh, we can just do geoengineering” (implied: “and not severely screw something up worse than with CO2 emissions”) emerge?
Floccina
Nov 11 2021 at 2:02pm
IMHO a co2 tax were all the proceeds are paid out for removal of co2 from the air makes the most sense. I might turn out to quite cheap.
Ken Costello
Nov 12 2021 at 7:24am
Here is the summary of my take on a carbon tax extracted from a chapter I wrote for a book published by the Hoover Institution:
An idealized Pigouvian tax—which advocates argue is efficient and economically benign—must satisfy, however, a set of conditions that policy makers cannot presume to exist: (1) it must replace regulations rather adding to them in controlling GHG emissions; (2) the additional revenues for government should lower distortionary taxes such as the personal income tax or corporate income taxes; (3) the revenues should steer away from uneconomical projects or funding of energy sources favored by certain interest groups; and (4) it requires a tolerably accurate estimate of the social cost of GHG emissions and abatement rather than estimates based on political and other empirically invalid factors. Especially when none of these conditions hold, the efficacy of a carbon tax to improve the state of affairs becomes highly suspect.
Seppo
Nov 12 2021 at 7:37am
I don’t see these models being contradictory.
We could let geo-engineers sell emission quotas created by their carbon-negative activities on open market and accept that other companies could avoid paying CO2-taxes if they have quotas for their emissions.
And if we would manage to create a global market for these quotas, it wouldn’t matter where the geoengineering is done and where CO2 is produced.
David Henderson
Nov 12 2021 at 9:22am
I think you don’t see it because you’re misunderstanding geo-engineering. If geo-engineering involved only carbon-negative activities, then you would be right. But take a look at the geo-engineering literature. A good place to start is the chapter in Superfreakonomics. There are a number of forms of geo-engineering that don’t involved reducing carbon.
Matthew W
Nov 13 2021 at 2:51pm
A cap and trade market is superior to a carbon tax. That is basically what this post is saying.
David Henderson
Nov 13 2021 at 5:31pm
That’s not at all what this post is saying.
You seem fixated on carbon reduction, as do some of the other commenters. But carbon reduction is not the clearcut least-cost way to deal with global warming.
Comments are closed.