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Ed Dolan's Econ Blog

Why Conservatives Should Love a Carbon Tax—and Why Some of Them Do

Last Week the White House released a long-anticipated Climate Action Plan. Conservatives have been swift to attack it as a “backdoor energy tax.” The critics could not be more wrong. A carbon tax, or energy tax of any kind, is the one big piece that is missing from the President’s plan.

Despite the criticism, though, some prominent conservatives see a better way of turning the issue of energy taxes to their advantage. Among those who support a carbon tax are Gregory Mankiw, Harvard professor and former Chairman of the President’s Council of Economic Advisers under George W. Bush; George P. Schultz, Treasury Secretary under Richard Nixon and Secretary of State under Ronald Regan; and  David Frum, former special assistant to George W. Bush.

Here are some of the reasons why conservatives, even the climate skeptics among them, should love a carbon tax.

A carbon tax would improve tax efficiency

Although conservatives don’t like taxes, they reluctantly agree that the government does need revenue. In recent years, their budget plans have called for a reduction in federal spending to a range of 18 to 20 percent of GDP. To fund even that level of spending without large deficits—which they also dislike—would require a lot of tax revenue. Where should it come from?

There is rare unanimity among economists in answering that question: Revenue should come from broad based taxes that have the lowest possible marginal rates and the fewest possible exemptions, deductions, and preferences. The current U.S. tax system is about as far from that ideal as you could get. As a result, it produces maximum distortions of business and consumer decisions while producing a minimum of revenue.

The corporate income tax is Exhibit A for these defects. Since Japan cut its rate last year, the United States has the world’s highest marginal tax rate on corporate income. However, the U.S. corporate tax has so many exemptions and deductions that many of the largest companies pay no tax at all, and the tax as a whole produces only a trickle of revenue. The corporate income tax today brings in revenue equal to just 2.7 percent of GDP, down from 6 percent in the 1950s. Because other countries have fewer loopholes, they get more revenue from their corporate taxes even though their rates are lower. Yet despite raising so little revenue, the corporate income tax distorts business decisions in major ways. To name just a few, it encourages financing with debt rather than equity, encourages moving operations offshore, and discourages repatriation of profits. Even companies that pay no tax to the government suffer, since tax avoidance requires them to use business practices that they would not otherwise choose. In many cases, the corporate tax subjects income to double taxation, once when it is earned by a company and again when distributed as dividends.

A carbon tax, by contrast, is much more broadly based, since economic activity of every sort depends to some degree on carbon-based energy. Even a low rate of tax would raise a large amount of revenue. Introducing a carbon tax and using the proceeds to reduce rates on other taxes would maintain revenue neutrality while reducing tax distortions to business decisions.

A recent study from MIT gives some estimates, using a large-scale model of the economy. The study explores the effects of a tax of $20 per ton of CO2, beginning in 2013 and rising at a rate of 4 percent per year. (As a rough rule of thumb, each $1 per ton of CO2 is equivalent to about one cent per gallon of gasoline.) Such a tax would generate enough revenue to cut the corporate tax rate by 2.23 percentage points by 2015. The result would be net gains to the economy of $2.7 billion, when the economic burden of the carbon tax is balanced against the reduced burden of the corporate tax. The efficiency gains would be nearly as large if the carbon tax revenue were used instead to reduce personal income or payroll tax rates.

A carbon tax would make the economy more resilient

Although some on the political right continue to maintain that the whole idea of climate change is a hoax, many mainstream conservatives take a more considered view. For example, in a recent Washington Post op-ed,  Rep. Lamar Smith (R-Texas), Chairman of the House Committee on Science, Space and Technology, writes that “climate change is an issue that needs to be discussed thoughtfully and objectively.”

As climate scientist Judith Curry points out in recent Congressional testimony, any thoughtful and objective discussion must acknowledge that many uncertainties remain in climate science. Not on basic points like the heat-trapping properties of CO2, where there is broad scientific consensus, but rather, on the times, places, and forms in which climate risks are likely to manifest themselves—whether as droughts, floods, coastal storms or something completely unanticipated. Those “deep uncertainties” make it impossible to calculate a single, optimal response to climate change.

As a result, climate scientists and economists, along with Curry, increasingly recognize that the proper response to climate risks is to promote resilience through policies that enable our economic and social system to cope with shocks and adapt to unexpected changes.

A carbon tax is an ideal way to encourage such resilience because it capitalizes on the inherent flexibility of the market. Even if we cannot calculate the optimal value of the tax—estimates range from a few dollars per ton to as high as three-hundred dollars—even a small tax will begin to exert steady pressure for change across a broad front. A carbon tax would give equal encouragement to development of low-carbon alternative energy sources and to energy conservation. It would not only spur the search for winners, it would winnow out losers before they become politically entrenched. (Corn-based ethanol is a case in point.) The result would be a more diverse and efficient energy mix.

Beyond environmental considerations, using a carbon tax to foster a more resilient energy economy would have other benefits.

For one thing, a carbon tax would make the U.S. economy more resilient to geopolitical shocks. Greater energy efficiency and a more diverse domestic energy base would make the country less vulnerable than it now is to political events in the often unstable and unfriendly countries that supply much of our imported energy.

At the same time, a carbon tax would make the economy more competitive in international trade. That proposition might draw raised eyebrows from the “affordable energy” crowd, but it is a fact. There is little evidence that low domestic energy prices are either a necessary or a sufficient condition for strong export performance. Consider that export superstar Germany has among the highest energy prices in the world, while the list of countries with the lowest energy prices is littered with import-dependent basket-cases like Egypt and Pakistan. To be competitive, a country has to be ready to react to changes in the global economy—booms or busts in trading partners, changes in global commodity prices, and technological changes. An efficient tax system with low marginal rates plus a diverse energy mix would enhance the flexibility needed to meet trade challenges.

A carbon tax is better than the regulatory alternative

In contrast to the flexibility and resilience of market-based environmental policies like a carbon tax, command-and-control regulations are inherently rigid and brittle. Fuel economy standards for motor vehicles are a case in point. As I explained in an earlier post, regulatory standards lock in government-favored technologies while discouraging the exploration of innovative ways of achieving fuel efficiency. Worse, they actually provide perverse incentives to waste energy. Existing fuel economy standards encourage production of fuel-efficient cars, but once you own one, its low operating costs give you an incentive to drive more miles. The standards also encourage people to delay junking old cars since the new, regulation-compliant models cost more. In contrast, a carbon tax provides an incentive both to buy new, fuel-efficient cars and to drive existing cars fewer miles.

Unfortunately, conservative resistance to carbon taxes has the unintended consequence of encouraging greater reliance on regulation. That is very much evident in the new climate action plan. The plan contains not a word about a carbon tax, presumably because introducing one would require Congressional action. Instead, the plan consists entirely of measures that the administration can implement on its own authority. Most of the items proposed are subsidies for selected technologies (for example, solar panels for federally supported housing) and command-and-control efficiency standards (for power plants and heavy trucks). Yes, some of the ideas in the plan are good ones, but those would rise to the top under the market-based incentives provided by a carbon tax. The bad ideas in the plan would never see the light of day.

The bottom line

Putting all of this together, a carbon tax is a natural for conservatives. Conservatives know the tax system is broken; a carbon tax could be a key element in comprehensive tax reform that aims to broaden the base and lower marginal rates without increasing the deficit. A carbon tax would enhance the resilience that the economy needs to respond not just to environmental risks, but also to geopolitical and trade shocks. Finally, support for a carbon tax would help counter the impression that conservatives don’t care about the environment, a key turnoff for younger and more educated voters.

Prominent conservatives like Gregory Mankiw, George Schultz, and David Frum know this. Why aren’t more jumping on the bandwagon?

This is the first in a three-part series. Here are links to Part 2 (progressives) and Part 3 (libertarians).

Addendum: Just after this post was published, the Energy and Enterprise Initiative at George Mason University awarded second place in a “Young Conservative Thought Leaders” contest to an essay entitled “How the GOP Could Win the Climate Debate.” The essay, which you can read here, endorses a revenue-neutral carbon tax. The essay is signed “Eric Bradenson.” The contest organizers go on to explain that “Bradenson” is a pen name. The writer chose to use a pen name because he currently works as a Republican staffer for a Republican House Member and “opted to remain anonymous for job security reasons”

 

34 Responses to “Why Conservatives Should Love a Carbon Tax—and Why Some of Them Do”

ThomasGrennesJuly 1st, 2013 at 12:07 pm

Current taxes on gasoline in the U.S. are not zero. Is it possible that if the optimal tax on carbon is low enough, current taxes on gasoline are too high? Don't the global benefits from a carbon tax depend on how many countries impose a tax and at what level? China is now the largest carbon emitter, and the government shows little interest in limiting emissions. India and Russia are other major emitters with little expressed interest in imposing limits. If Americans ship coal to China for use in new power plants, doesn't this reduce the gain from a tax? On competitiveness, doesn't a tax change the comparative advantage for carbon intensive goods?

Bryan WillmanJuly 1st, 2013 at 12:30 pm

I. I've seen at least one argument that a carbon tax wouldn't reduce net CO2 very much, because for so many things there are no actual alternatives. One imagines that would change over time, but perhaps too slowly to matter.

II. If you think mere rational tax policy is going to correct the corn ethanol rules, I suggest you review carefully how the electoral system works, and note the date of the Iowa caucus.

III. The "So What" view of climate change (implications below):
a. Managing a world wide hazard such as CO2 requires world wide discipline
b. Forever
c. a. and certainly b will not happen.

Implication: There's no point engaging painful excercises to control CO2 emissions – they won't be sustained by enough of the world's population for long enough.

warnerta@gmail.comJuly 1st, 2013 at 2:53 pm

Grennes makes fair points, and though Mankiw is Republican and works for conservatives I wouldn't call him a conservative, but I'm very much on your side, Ed. The arguments against seem to be mostly like Bryan's: we're doomed anyway so why bother. Indeed, why have laws, why have civilization, why educate our children.

Paul VincelliJuly 1st, 2013 at 3:11 pm

Several months ago, the University of Kentucky hosted of forum on climate change with three excellent speakers who were all self-described conservatives. One of the speakers (Bob Inglis) is a very articulate proponent of a revenue-neutral carbon tax. The other speakers were fabulous also. Liberals reported how they better understand that there are thoughtful conservative perspectives on, and solutions to, climate change, thus allowing for a broadened public discussion. In turn, conservatives in attendance learned the same thing. You can watch the recording of this event at http://bit.ly/135gvNa. The starting time for each speaker is noted at this page, so you can listen to the speakers of greatest interest to you.

Jardinero1July 1st, 2013 at 6:59 pm

A national sales tax and property tax would have have the broadest base and the lowest marginal rates. The apparatus to assess and collect property and sales tax already exists in all fifty states. The federal government could piggyback on the existing state apparatus.

CO2 is not a bad. It is vital trace element, without which, all life on earth would be impossible. It has been in decline for eons. It reached a nadir only in the last one hundred fifty years. We have bought times for life on earth by putting some of it back. It would be foolish to stop putting CO2 back into the atmosphere.

William TJuly 2nd, 2013 at 5:18 am

One major problem with using a carbon tax to fill the government coffers is that it conflicts with the primary goal of taxing carbon which is to reduce and eventually eliminate human caused CO2 pollution. If the government becomes dependent on carbon taxes for its funding, then their interest tends towards the maintenance of this cash income rather than the eventual elimination of carbon emissions. Hansen's proposal tries to avoid that trap.

joseph glynnJuly 2nd, 2013 at 10:17 am

It is great to see the case being made for carbon taxation. I believe some Scandinavian countries applied carbon taxes in the 90's and it worked well. It offers an effective, efficient and equitable way to address the greenhouse gas emissions which are causing climate change and which is already making homes and businesses un-insurable in parts of the UK and US. Taxpayers will have to rehouse flooded families and firms.
We ought to care about our legacy to the next generations; will it be life or death?

Europe's ETS emissions trading has not worked well. Let's revive the UN as a democratic global authority and impose the carbon tax universally via trade sanctions if necessary.

david j michelJuly 2nd, 2013 at 12:56 pm

why don't we all live off of green energy,most Obama supporters live in the dark anyway!

RevNeuJuly 2nd, 2013 at 1:24 pm

I believe China is in the process of setting up a regional cap-and-trade system and hopes to implement a nationwide system by 2016. They are also heavily investing in alternative energy, so I would not say that they are showing little interest in cutting emissions. From my understanding some of their tepidness stems from the fact that the United States has not embraced a carbon pricing scheme. Both nations fear the possibility of becoming uncompetitive should the other choose not to pursue carbon pricing.

It should also be pointed out that carbon pricing policies are gaining increasing traction throughout the rest of the world. It's true that a major economic power has yet to implement an effective pricing scheme (the EU cap-and-trade system is a mess), but China may change that. Regardless the United States has an opportunity to lead on this issue by pursuing a carbon tax (ideally a revenue-neutral tax).

I think Ed Dolan addressed some of the main concerns over competitiveness, but border adjustments can also be set up to ensure that domestic firms within nations that levy a carbon tax are protected from foreign competitors that are not subject to such a fee.

EdDolanJuly 2nd, 2013 at 1:27 pm

1. Yes, a carbon tax would work better the more countries participated. I think Wm. Nordhaus has written at length on this, and he is right.

2. With regard to gasoline taxes, my view is that we should scrap the old gasoline tax, which was originally implemented as a use tax to raise funds for road building and repair. With today's technologies, it would be possible to replace it with a transponder based system of road-use taxes based on mileage. Then, with a mileage tax targeted at road costs, add a broad energy tax targeted at externalities.

EdDolanJuly 2nd, 2013 at 1:32 pm

You write, "There's no point engaging painful excercises to control CO2 emissions"

You are right, if no one else joins efforts to control pollution, individual action has little practical effect. Practicality aside, though, there is still an ethical side to it. What if you were walking down a storm-damaged Main Street and you saw a crowd of people looting an electronic store. Would you say, "I'd better grab one of those TVs before they're gone; there's not point in being the only one not to steal when everyone else is stealing."

jack strawJuly 2nd, 2013 at 2:00 pm

another wonderful article. home runs galore and again thank you. you remind us that though we live in a very unelightened age we need not be this way. i look forward to following the progress of this story and hope the plan comes to fruition. coal has an massive untapped market to provide heat to homes. regulations creating boiler systems that are highly efficient for rural and suburban homes strike me a technological possibility. this has added effect of free up oil reserves to "lower the boom" on all those anti-competitive situations the USA finds itself in. (creating cartels here in North America…if i may be blunt.) who knows…maybe it will even do something about that YAWNING trade gap. (gab? how do you spell that?) the German "Oest Plan" even today strikes me as highly inefficient. in New York we call it a "pass through provision." now…back to the cold hard business of building my tomb. It's much large than the Pyramids of course.

ThomasGrennesJuly 2nd, 2013 at 2:35 pm

Yes, Nordhaus has addressed the multiple country issue. His proposal is to levy a carbon tax at the same rate in all countries. Reaching agreement on the common tax rate is not simple. Individual countries are affected by warming in different ways, and
some countries and industries would gain from moderate warming. Since getting the U.S. Congress to agree on any fiscal issue is almost impossible, how easy would it be to get President Obama, President Putin and President Xi Jinping to agree on the level of a tax that may be optimal for the world, but sub-optimal for each country?

ThomasGrennesJuly 2nd, 2013 at 2:41 pm

Yes, the Chinese government is talking about cap and trade, and Chinese citizens are openly complaining more about local pollution levels that are literally making people sick. However, at the same time China imports more coal and opens more coal-fired
power plants frequently.

GuestJuly 2nd, 2013 at 3:09 pm

Taxes distort markets. Energy is already a heavily taxed market. The theory of the decade is CO2 is dangerous and needs to be eliminated. Most seem to ignore the consequences of their tax. One: a carbon tax will result in an environmental disaster. A carbon tax would increase wind, solar and nuclear. Wind and solar depend on the destruction of natural habitats because the energy conversion equation is Force = Mass times Acceleration. To get more mass to make electricity, one must take more of the surface of the Earth. What happens when humans destroy their natural habitats? An example from England illustrates. A very rare and very endangered bird was last seen in England in 1991. The bird recently reappeared, only to be killed by a wind turbine. ( http://now.msn.com/bird-hits-wind-turbine-rare-wh… ) . Carbon taxes will make these type of unpreventable events more common as society is forced to move away from carbon fuels. Two: a carbon tax is regressive. The upper half of society can absorb the rising cost of energy. The bottom half of society can not. Energy is a very large portion of the poor's budget, and a carbon tax will squeeze a small budget further. Three: a carbon tax is based on unproven science. There are 22 climate models which have been developed by the brightest minds of the world. Not one model shows the correlation between CO2 build up and increased planet temperatures. How could this be since the table top experiment shows the temperature should be rising? This simple engineer has worked with complex systems over a 40 year career. I have never seen a complex system which can be controlled using one variable. The core assumption of the CO2 zealots is climate can be controlled by controlling CO2 build up. Common sense says they are wrong now and will forever be wrong, even if the world stopped using carbon. The climate is a multi-variable complex system which will never be controlled by a single variable. If the policy goal is to improve the atmosphere without destroying habitats, then society has to get comfortable with nuclear's challenge, used radioactive fuel. The technology exist to solve used nuclear fuel issues while the leadership, investment, and desire for change does not.

Jose OJuly 2nd, 2013 at 5:05 pm

When listening to opinions about the reality / falsity of climate change, global warming, and the CO2-driven greenhouse effect increase, remember one very important point.

If you weight people's opinions by their previous rate of success at prediction, you get the opinion of science as the only probably-accurate prediction for the climate.

Thus when trying to assess whether carbon dioxide will or will not be taxed, remember that because science has no choice but to predict that increasing temperatures accompany carbon-dioxide increases, due to infrared scattering by 3+ atom molecules like carbon dioxide combined with basic thermodynamics like the black-body spectrum and the claussius-clyperon relation for water vapor, there is no debate that global warming won't stop magically.

Factoring that into the likely-hood of a carbon-tax, you get that a carbon tax of some sort is simply a matter of time, and that your investment ideas in the long term need to adjust for this basic fact of nature and economics.

Signed, a physicist, engineer, and young entrepreneur.

GuestJuly 3rd, 2013 at 12:33 pm

Sorry for the long post, but i offer a challenge….a science challenge. The head of a major corp climate change group shared with me recently something to the affect: our only scientific justification for a carbon tax is rising CO2 levels. All 22 of the global predictive models on the impact of rising CO2 are meaningless. No one understands the science of rising CO2, for if they did, they would produce a predictive model. In my part of the world, one belongs to the "Flat Earth Society" when ones beliefs are stronger and more important then what the hard data is telling you. Whom will invest on a guess? No data; No Science; Only a guess!

For the CO2 Zelots, there is a Nobel Prize waiting for the person or group that truly gets the prediction of the climate right. The skill set will be a combination of fluid dynamics (the atmosphere is continually changing), geo physical science (the Earch's core and magnetic field is continually changing), Astro physics (the sun's energy input and absorption by/to the Earth is continually changing), Chemistry ( the chemical make up and CO2 production are continually changing) and Biology (the absorption and production of CO2 is continually changing). Until all these factors are predicted in a parts per million or its equivalent level, one is only guessing……and, I may have missed a few key variables.

A mind experiment: Please consider, if I add an additional penny to my pocket before I get into my car for a trip, I will negatively impact the car's performance due to increased weight. The penny is part of the car's new performance system. CO2 Zelots see the penny addition to the atmosphere as the weight of an elephant which overwhelms all other performance systems. On the oer hand, the CO2 doubters see the penny as a change and an impact on the atmosphere, but not an impact equal to an elephant.

One may be able to win a Nobel Prize simply by proving that CO2 will have a greater impact than the combination of the variables I mentioned….but, hard data versus Flat Earth feelings and guesses will be required. Or, a good start might be to explain why the Earth has been warming for 10,000 years……citizens of the world would also be served if you or another could accurately predict or just explain when this mega warming period which started 10,000 years ago will reverse.

I do not have the skill set nor the energy to win the Nobel Prize in this area. I only have the common sense to know that a Carbon Tax will have zero positive impact on improving the atmosphere. If those that fear the continued build up of CO2 wish to impact the world, then get off the solar and wind kick because their ability to impact energy needs is very small. Pick an energy source that will not impact the atmosphere nor impact the destruction of the habitat we also depend upon.

EdDolanJuly 3rd, 2013 at 1:48 pm

You write,"No one understands the science of rising CO2, for if they did, they would produce a predictive model"

Yes, you are correct in saying that existing climate models have serious limitations when it comes to predictive powers, especially when it comes to the way natural and anthropogenic climate drivers interact. I invite you to read the congressional testimony by Judith Curry that is linked in the text. Curry essentially agrees with you that there are problems with climate prediction.

However, in my view, the limited predictive power of climate models is not a decisive argument against a carbon tax, for two main reasons:

(1) Even if we take climate change out of the equation entirely, a carbon tax is arguably superior to many of our existing taxes, especially the payroll and corporate profits taxes. A revenue neutral tax reform shifting from those taxes to a carbon tax would, as the MIT study argues, have net benefits for the economy even when climate is not considered. Furthermore, a modest carbon tax can be justified on the basis of nonclimate environmental effects of fossil fuel use, such as local smog and acid rain.

(2) Saying that climate models have limited predictive effects is not the same as saying that CO2 has no effect on the climate. What we are facing is a situation of "deep uncertainty"–not just uncertainty about the outcome, as in a card game, but uncertainty about probability distributions, model structures, and so on. As Donald Rumsfeld famously put it, we are facing "unknown unknowns." The proper response to unknown unknowns is not to do nothing, but to build resilience to respond flexibly and appropriately to events as they unfold. A carbon tax, as I argue in the post, would promote resilience.

Compare the situation to saving for your retirement: Yes, models used by financial planners have limited predictive powers, the same uncertainties about probability distributions, model structures, and unknown unknowns. As a result, you know for certain that you cannot compute an optimal retirement strategy. What do do? You can react to those deep uncertainties by not saving at all. You could also react by keeping your entire 401(k) in cash in your desk drawer. Or you could chose to pursue a financially resilient strategy that would include (1) diversification of investments to minimize your maximum loss and (2) applying the precautionary principle and saving a little bit more than you think you will need in case you have bad luck despite your diversified investments.

GuestJuly 3rd, 2013 at 5:05 pm

You made three propositions. I will take them in order:

1. ((a carbon tax is arguably superior to many of our existing taxes, especially the payroll and corporate profits taxes. A revenue neutral tax reform shifting from those taxes to a carbon tax would, as the MIT study argues, have net benefits for the economy even when climate is not considered. Furthermore, a modest carbon tax can be justified on the basis of nonclimate environmental effects of fossil fuel use, such as local smog and acid rain))

Does carbon have anything to do with the superior nature of this tax versus existing taxes? Why not just an Energy Tax, a Consumption Tax, a National Sales Tax or some other similar tax? Would not each of these other tax approaches have a similar benefit? My point: The only benefit carbon may have over other similar consumption taxes: A portion of the public believes carbon is evil, and therefore, deserves to be taxed. Therefore; the perception makes a new carbon tax an easier sale to the voting citizen. The political problem with this strategy is those who like a carbon tax are also those that think carbon is evil. Therefore, there is no benefit to a carbon tax if one is trying to attract the non believers to a carbon tax agenda.

Taxing externalities – such as smog and acid: I would argue the opposite. The net benefit of non-climate externalities are best handled through regulation versus a tax. A tax distorts the purpose and outcome of managing these externalities, while the regulation directly addresses the externality by putting a common and even standard of improvement relative to that externality. Regulation has been a superior method of cleaning up the water and air in our great nation. To ruin what is working would be a step backwards.

2. Managing the “Known Unknowns” and the “Unknown Unknowns” of climate change.

Dr. Curry’s Congressional testimony can be found at (http://curryja.files.wordpress.com/2013/04/curry-testimony-2013-il.pdf) Her testimony stated:

{{When uncertainty is not well characterized and there is concern about ‘known unknowns’ and ‘unknown unknowns,’ there is increasing danger of getting the wrong answer and optimizing for the wrong target.……… Under conditions of deep uncertainty, the following options are open to decision makers:
• Delay in order to gather more information and in the hope of reducing uncertainties
• Enlarge the knowledge base for decisions through broader perspectives
• Invoke the precautionary principle
• Adaptive management
• Build a resilient society.
“determine which decision options are robust to a variety of plausible futures….The role of climate science in CIDA is to determine the plausibility of relevant groups of climate conditions that would affect the project. This can be accomplished by sensitivity analyses using climate models, analysis of historical and paleo- climate data, and the use of statistical models” (The World Bank – Climate Informed Decision Analysis-CIDA)}}

My only negative in Dr. Curry’s testimony is the World Bank quote at the end. If ALL climate models are failing, how does one do a sensitivity analysis on the 22 climate models that are not working?

On a positive note, I agree with the decision maker’s options. Our President and Department of Energy claim they are in an “all of the above” option mode for energy, which would seem to reflect leadership choosing “Adaptive Management” and “Build a resilient society”.

Or, as you said:

(continued in next comment)

GuestJuly 3rd, 2013 at 5:06 pm

3. (((you could chose to pursue a … resilient strategy that would include (1) diversification …. to minimize your maximum loss and (2) applying the precautionary principle and (setting aside gains) in case you have bad luck despite your (diversity).)))

And please excuse me, but my way of saying the same thing is: Diversity! Renewable, Fossil, Efficiency and Nuclear Energy!

The Cliché, what someone does is more important than what someone says, helps unravel the USA’s energy strategy. $90B has been awarded to the wind and solar industries, while other energy sources have gone wanting. The Key Stone Pipeline has been delayed; only to be delayed some more. Off shore drilling has been delayed, stopped and restarted due to a drilling accident. Awards to license new nuclear designs and approaches have been slow, uneven, and under-funded, while a positive note of four new nuclear units have had construction initiated. CO2 has been declared an air pollutant. Used nuclear fuel storage (Yucca Mountain) has been cancelled after spending $+20 billion over thirty years. The USA energy strategy of “All of the above” really means a war on all fossil fuels; a slow, quiet, and limited nuclear future; let efficiency/new technology advance, and solar/wind as the only funded option, even though the ability of solar/wind to meet future electric needs is not expected to occur over the next 50 years, if one is to believe most DOE publications and presentations.

Why say “No” to a carbon (and energy) tax?

CO2 is a variable in a very complex intertwined atmospheric and environmental system. I can make many viable and possible theoretical arguments that future generation of scientist and policy makers MAY wish to increase the atmospheric CO2 versus the current generation’s desire to stop or decrease CO2 growth. For instance, what if the world begins to cool due to a changing magnetic field of the Earth or a change in the sun’s energy output or any number of other variable changes? A warmer world is easier to imagine as desired versus a colder world. In a known/unknown and an unknown/unknown world, a carbon tax almost insures the nation will “get the wrong answer and will optimize around the wrong targets” on managing climate change.

More energy taxes would be equally dangerous to a fragile and noncompetitive economy. Cheap, clean, safe, abundant, affordable energy is the life blood of a modern economy. Modern society and its economy are built upon the concept of machines doing the work of man and beast. Taxes distort and depress the most essential element of a modern economy, energy. With cheap, clean, safe, abundant, affordable energy, our nation has clean air, clean water, climate controlled shelter, abundant food, and transportation. In a world of greater competition, cheap energy is essential to compete. Our nation and its policy makers will best serve the nation by finding tax and spend policies that grow our economy and opportunities. Further, if the goal is to have the world’s most desired and powerful nation, an energy rich nation will have the cleanest air, the cleanest water, and the most strength plus opportunity for all social classes.

That is the economics of energy; true diversity of energy sources has been the best policy throughout the history of modern man because it provides the best alternatives, adaptive management and a resilient society.

EdDolanJuly 3rd, 2013 at 6:22 pm

(1) Therefore, there is no benefit to a carbon tax if one is trying to attract the non believers to a carbon tax agenda.

You are right, some of the same arguments can be made in favor of a general consumption tax. However, keep in mind that politics is about coalition building. It is possible that a majority coalition could consist of people who are worried about climate change but don't care much about tax reform, and people who care about tax reform but don't care about climate change. Suppose each represents 30 percent of available votes. Even though a carbon tax might be second choice for each group, it still might be the only policy that could put together a majority.

(2) "Taxing externalities – such as smog and acid: I would argue the opposite. The net benefit of non-climate externalities are best handled through regulation versus a tax.

I just flat-out disagree with you there. I address this issue at some length in the post on CAFE standards linked in the post ( http://www.economonitor.com/dolanecon/2011/07/15/… ) The argument is a general one, not limited to CAFE standards.

(3) As I said in the post, I think you exaggerate the importance of affordable energy. I will try to work up a post devoted to the issue of relationship of energy pricing and economic competitiveness.

You could make the "affordable this" or "affordable that" argument about anything. For example, we could argue that everything in the economy needs labor, therefore should we bust unions, put prisoners to work, bring back child labor all in the name of "affordable labor" or competitiveness?

The argument from "affordability" is a non argument. A properly operating market economy seeks only one price: The price that covers the true cost of producing and using any good, when all external effects are included in the calculation. If we disagree about the externalties of CO2–obviously we do–let's discuss that, not bring in the red-herring of "affordability."

GuestJuly 5th, 2013 at 8:46 am

((((2) "Taxing externalities – such as smog and acid: I would argue the opposite. The net benefit of non-climate externalities are best handled through regulation versus a tax. I just flat-out disagree with you there. I address this issue at some length in the post on CAFE standards linked in the post)))

Your referenced article demonstrates the economic difference between taxing a product (gasoline) and regulating outputs from the product (miles per gallon). A Carbon Tax is not a tax on carbon (the product), but a tax on the output, CO2. Here is a paper that discusses the difficulty of taxing an output. http://www.nber.org/chapters/c10604.pdf. In short, if you wish to tax CO2 production, then tax all CO2 producers. Shall we start with university professors? :>))

3. Affordability – I look forward to your post on the subject and will with hold comment until I see your complete thoughts.

Shelley BuonaiutoJuly 5th, 2013 at 8:50 am

I was just in DC attending the Citizen's Climate Lobby conference and speaking to mostly conservative members of congress to promote a carbon tax. I appreciate your well researched article. I have one question I'd like to clarify. You write:

Such a tax would generate enough revenue to cut the corporate tax rate by 2.23 percentage points by 2015. The result would be net gains to the economy of $2.7 billion, when the economic burden of the carbon tax is balanced against the reduced burden of the corporate tax. The efficiency gains would be nearly as large if the carbon tax revenue were used instead to reduce personal income or payroll tax rates.

My question: If the carbon tax is used to reduce corporate, or personal income taxes, wouldn't this affect the amount of revenue being generated as the amount of carbon decreases? If the tax is revenue neutral, with most or all of the dividend returned to the consumer, then as the amount of revenue decreases with the decrease in carbon emissions, would the price of energy also decrease, as we transition to free sources of energy with the infrastructure in place? Of course, we may still be dependent on a baseload energy, which may be a hugely expensive nuclear. There should also be a benefit to the economy from the incentivizing of green technology and the resultant jobs. Would this likely be sufficient to counter the loss of tax revenue from decreasing carbon?

GuestJuly 5th, 2013 at 4:31 pm

Your concern that CO2 will be reduced is unfounded in my opinion. A USA Carbon Dioxide tax ((carbon Tax) will continue to grow as CO2 content in the global atmosphere grows. Why?

Global energy markets are some of the most rapid to adapt. Here is a recent example with various links. http://theenergycollective.com/michaelgiberson/18…. In this example, the USA EPA effectively outlawed coal. The coal market rapidly adjusted to the change.

Based on 40 years of following global energy markets, a USA Carbon Tax will move USA fossil fuel sales and consumption of those fuels to other nations. CO2 from the oxidation of carbon on a global basis will not be impacted by a USA CO2 tax.

If policy makers wish to reduce CO2, they should not try to tax an emission like CO2. The strategy is difficult to target and rarely has the intended consequence. If the nations of the world wish to control CO2 additions, the strategy that works is regulating ALL CO2 sources at a global level.

A Warning: Be careful what you wish for. For example only, For each unit of air humans we breath in, we discharge air with 100 times the CO2. Since humans are large CO2 generators, do they need to be regulated and/or taxed for their CO2 contribution to the atmosphere? Why give preference to one form of CO2 generation versus another? These are hard questions for the policy maker, but if a Carbon Tax is created, it is only a matter of time before these questions will have to be answered by the policy maker or a fiat decision by the executive branch or a regulator decides they wish to tax the individual for being alive and breathing.

Arno ArrakJuly 15th, 2013 at 10:48 pm

Ed Dolan: you wrote three articles on carbon tax. They each deserve a comment.
Why are you pushing this insane tax on “carbon?” Carbon dioxide is not causing any warming today nor has it done so for the last 15 years as even Pachauri of the IPCC has admitted. In case you haven’t noticed, there is more carbon dioxide in the air now than ever before and yet there is no sign of that alleged greenhouse warming it is supposed to produce. We are looking at a natural experiment set up by forces of nature that demonstrates its inability to warm the world. And I guarantee that it did not suddenly lose its ability 15 years ago but never actually caused any warming. The absence of greenhouse warming also follows from Ferenc Miskolczi’s theory of saturated greenhouse warming. But you don’t need his theory to come to the same conclusion by using simple physics. Laws of physics require that in order to start a greenhouse warming you must put carbon dioxide into the atmosphere at the exact same time. That is because the absorptivity of carbon dioxide in the infrared is a property of the gas and cannot be changed. If you want more absorption to increase warming you must put more absorbing molecules into the atmosphere. There were three occasions within the last 100 years when warming suddenly started. The first one was the early century warming which started in 1910 and stopped with WWII cooling. It raised global temperature by half a degree Celsius. The second one was in 1976 and was called the Great Pacific Climate Shift. It raised global temperature by 0.2 degrees and was finished by 1980. The third one was a step warming that accompanied the super El Nino of 1998. It raised global temperature by a third of a degree Celsius and then stopped. And this is it for the whole century. The only thing you need now is the Keeling curve and its extensions to determine what kind of warming it was. It turns out that none of these three episodes are greenhouse warming episodes because there was no increase of atmospheric carbon dioxide when they started. The Keeling curve and its extension are just featureless at these three critical temperature values. It is really hard for me to understand why any rational person can fall for the mindless destruction of civilized life in the name of saving the world from a non-existent danger. If Climategate did not teach you anything, here is one way you never heard of that was used to cheat us into believing in the global warming scam. In the eighties and nineties all ground-based temperature curves were showing a “late twentieth century warming.” I compared it to satellite temperature curves and found that it simply did not exist. I complained about it in my book and demanded an investigation when the book came out in 2010. Nothing happened until last fall when GISTEMP, HadCRUT and NCDC suddenly decided to
give up that phony warming and align their data for the eighties and nineties with satellites. I consider this concerted action tantamount to an admission that they knew the warming was fake. In the meantime, while it was official, it was referred to by people writing articles as proof of the existence of man-made warming because no one could find a natural cause for it. Man-made all right, cooked up in the back rooms of guardians of temperature. It is a scientific fraud and it is not sufficient to simply change the record without telling anyone about it and expecting to get away with it. But such is the character of people involved with the global warming enterprise that you are supporting.

EdDolanJuly 15th, 2013 at 11:44 pm

Your comment is entirely about climate science. I am not a climate scientist. I am an economist. Perhaps it would be best if you interpreted all three of my posts as saying "If GHG emissions cause environmental harm, then a tax is the proper response."

I am completely in agreement with you that the inverse of this proposition is also true: "If GHG emissions cause no environmental harm, then the optimal level of a carbon tax is zero."

If you want to get engaged in the debate over climate science–and it is fascinating, but just not my field–I highly recommend that you become a regular reader of Judith Curry's blog "Climate, Etc." ( judithcurry.com ). Prof. Curry welcomes all points of view to the lively debate on her site.

David OnkelsJuly 16th, 2013 at 12:17 am

"You write, "There's no point engaging painful excercises to control CO2 emissions"

You are right, if no one else joins efforts to control pollution…"

CO2 emissions are not, in my opinion, pollution.
From wikipedia: "A pollutant is a substance or energy introduced into the environment that has undesired effects, or adversely affects the usefulness of a resource. A pollutant may cause long- or short-term damage by changing the growth rate of plant or animal species, or by interfering with human amenities, comfort, health, or property values. Some pollutants are biodegradable and therefore will not persist in the environment in the long term. However the degradation products of some pollutants are themselves polluting such as the products DDE and DDD produced from degradation of DDT."

I think the effects of CO2 in the environment are mixed: some good, some less desirable. Increased atmospheric CO2, in my opinion, has more desirable effects, in the form of greater synthesis and plant growth, and those effects are now being seen in some areas of the world.

historicusJuly 16th, 2013 at 9:37 am

None of this addresses the real solution which is abolishing the IRS and progressive taxation.

Period.

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