Don't Believe the Hype About a Carbon Tax
Gasoline prices have been rising recently as tensions heighten in the global oil market. These increases may soon be exacerbated if some advocates of a carbon tax get their way. With its flawed assumptions and high costs, politicians should ignore the hype and just say no to a carbon tax. It is expensive and ineffective, as an April report by the Texas Public Policy Foundation showed.
A recent proposal would set a price of $40 per ton of carbon dioxide emissions on emitters, which would hit fossil fuel producers especially hard. The Department of the Treasury estimated that a similarly priced carbon tax of $49 per ton could increase oil prices at least $21 per barrel. With oil prices hitting four-year highs as recently as May, this would substantially drive up gasoline prices even more, hitting the poorest the hardest.
The plan also includes rolling back some energy regulations and providing a “dividend” of roughly $2,000 annually to families of four to offset resulting higher energy prices. But this dividend is likely “crumbs” compared with the spike in higher electricity prices, gasoline prices, and overall higher cost of living burdening families because of a carbon tax.
And carbon tax proponents are also hard at work at the state and local levels. Washington Gov. Jay Inslee, for instance, recently announced his support for a statewide carbon tax, and the city of Austin just passed the first resolution in Texas calling for Congress to impose such a tax.
An argument for a carbon tax is that it can theoretically correct what some economists call “market failures” or “negative externalities” that impose social costs that are generally not factored into market prices — such as pollution. This “Pigouvian” approach to taxation is named after Arthur Pigou, a renowned English economist and Professor at the University of Cambridge.
Today, some pundits and politicians who claim the conservative mantle argue that a carbon tax is a free market solution to a market failure. The purported failure is that the marketplace does not adequately price the estimated social cost of carbon, which is deemed to be the global damages of climate change from carbon dioxide emissions. Yet, there is nothing conservative or free market about the government expanding its role in our daily lives through a carbon tax.
In theory, using Pigouvian carbon taxes is efficient and straightforward, but in practice, the Pigouvian solution is anything but simple. Often ignored by advocates of Pigouvian taxes is what gets referred to as “the knowledge problem.” That is, the few individuals in government lack sufficient information from prices and other sources available among the millions of individuals in the market to make sound decisions. A carbon tax is therefore problematic because it forces the decisions of a few on individuals, which may lead to the people and the environment being worse off than without the tax.
By taxing an economic input like energy production, government essentially taxes everything that we do, wear, eat, and use. History shows that this is all very destructive: Carbon taxes in Australia and British Columbia reduced standards of living, with Australia eventually repealing its carbon tax within just two years.
While proponents of the dividend approach, or even a revenue-neutral tax swap, claim this is a market-based, conservative plan, the truth is a carbon tax is based on highly questionable assumptions, leaving it as mainly a policy tool for social engineering with huge economic costs.
It’s discouraging to see otherwise thoughtful policymakers support the central planning that Pigouvian taxes promote. Prominent free-market economists Friedrich Hayek, 1974 Nobel Prize winner, and Frank Knight, co-founder of the “Chicago School” of economics, spent years debunking the rationale of Pigouvian taxes. Ronald Coase, 1991 Nobel Prize winner, spent his career pointing out the numerous flaws with Pigouvian ideas.
We can all agree that we want a healthy environment for ourselves and our children. It is clear, however, that government-directed central planning is not the best way to achieve that goal. Real environmental progress can and should be measured by the success already achieved in the reduction of toxic pollutants.
The EPA reports that the aggregate emissions of six common toxic pollutants (carbon monoxide, lead, nitrogen oxide, volatile organic compounds, particulate matter, and sulfur dioxide) have declined by 67 percent since 1980. Meanwhile, gross domestic product is up 160 percent and population is up 42 percent. Energy-related carbon emissions are down to near 1992 levels —thanks primarily to innovations such as hydraulic fracturing that has allowed far more production of cleaner burning natural gas.
Going forward, as energy subsidies and tax credits evaporate, allowing markets to work is the best path to more efficient and dependable energy sources that clean the environment and grow the economy. Politicians should not hinder our prosperity by imposing a carbon tax.
Vance Ginn, Ph.D., is director of the Center for Economic Prosperity and senior economist at the Texas Public Policy Foundation. Jonathan Williams is chief economist at the American Legislative Exchange Council and vice president of its Center for State Fiscal Reform.