Can a Carbon Tax Solve Man-Made Global Warming?

Last week, the U.S. National Climate Data Center declared that
2012 was the warmest year on record for the lower 48 states by a
healthy margin. In fact, 2012 was more than 3 degrees Fahrenheit
warmer than the 20th century average and 1 degree warmer than the
previous record year of 1998. In addition, the National Oceanic and
Atmospheric Administration flatly declared, in the draft version of
its National Climate Assessment report, “Climate change is already
affecting the American people” and it is “primarily driven by human
activity.”

The balance of the scientific evidence currently bears this out.
So if it’s true that man-made global warming will cause significant
problems for humanity, what should be done about it?

Back in 1992, the Rio Earth Summit launched an international
negotiation process under the United Nations Framework Convention
on Climate Change (UNFCC) with the aim of preventing “dangerous
anthropogenic interference with the climate system.” In 1998,
that process produced the Kyoto Protocol under which developed
nations committed to cutting their greenhouse gas emissions
(chiefly carbon dioxide) by an average of 5 percent below the
levels they emitted in 1990. The goal was to ration carbon dioxide
emissions through an international cap-and-trade carbon market.

The United States subsequently refused to join the Kyoto
Protocol and only the European Union set up a carbon-trading
market. As the recent U.N. climate change conference in Doha made
clear, the
Kyoto Protocol has failed. The nations of the world are now
supposed to reach some kind of binding agreement on limiting
greenhouse gas emissions by 2015 that would go into effect by 2020.
Since Kyoto Protocol-style cap-and-trade schemes have failed, what
other policies might gain international acceptance? One of the
chief contenders is a system of carbon taxes.

Before weighing the merits of the carbon tax idea, it’s worth
considering whether limits on greenhouse gases (chiefly carbon
dioxide) may be justified in the first place. In a persuasive 2009
article, “Taking
Property Rights Seriously: The Case of Climate Change,” Case
Western Reserve University law professor Jonathan Adler argues that
carbon dioxide emissions may be likened to common law nuisances.
Under common law, property owners are not permitted to use their
property in ways that damage their neighbors’ property, e.g., you
may not build a pond that floods your neighbor’s field. In Adler’s
view, the people who benefit from producing, selling, and buying
products and services that emit carbon dioxide should similarly be
held liable for the damages caused to their neighbors as a
consequence of emissions-induced temperature increases. Such
damages might include flooding from rising sea levels and more
intense rain events or crop losses due to changes in rain and
temperature regimes.

In other words, carbon dioxide emissions generated in the
production of certain goods and services likely impose costs on
people, but those costs are not borne by the producers and
consumers of those goods and services and are thus not reflected in
their prices. Such costs are often called externalities because
they are outside the market processes that would otherwise oblige
producers and consumers to pay for them. Ideally, people could seek
restitution in court for damages caused by emissions and the
damages paid would be reflected in the price consumers are
charged.

The trick is identifying those who are actually causing climate
damage and those who are being harmed by it. As the Nobel
Prize-winning economist Ronald Coase argued in his seminal 1960
article, “The
Problem of Social Cost,”[PDF] assigning property rights solves
this sort of puzzle by enabling people to settle the issue of
liability and payment for damages. Notionally, in the case of
global warming, people would be assigned property rights to the
atmosphere, leaving would-be polluters to negotiate payments with
these owners for the right to emit carbon dioxide. But as Coase
acknowledged, sometimes the transactions costs—meaning the costs of
identifying who’s harmed, the amount of the damages, and the costs
of adjudication—would simply to be too great to be practical.

In the eyes of many people, it appears quite impractical to
assign property rights to the global atmosphere,  even though
externalities are clearly being imposed upon third parties. In such
cases, the conventional argument holds that government intervention
is necessary to force market participants to take account of the
damages—the externalities—that they impose on third parties. After
the failure of the Kyoto Protocol, one such intervention getting
the attention of both the public and policymakers is a tax on
carbon dioxide emissions.

In his 1988 introduction to
The Firm, the Market, and the Law, however, Coase
countered this line of thinking. “The ubiquitous nature of
‘externalities’ suggests to me that there is a prima facie
case against intervention,” he wrote, “and the studies on the
effects of regulation which have been made in recent years in the
United States, ranging from agriculture to zoning, which indicate
that regulation has commonly made matters worse, lend support to
this view.” So the question is: Would a carbon tax make matters
worse?

Let’s take a look. Most economists prefer a revenue-neutral
carbon tax that would be imposed at the mine-head for coal, the
wellhead for natural gas, and at the refinery-gate for petroleum
products. Revenue neutral means the tax would not increase
government revenues, but would replace other taxes. One often-heard
proposal is a dollar-for-dollar reduction in taxes on labor (the
payroll tax) and on capital (the corporate income tax). One
significant upside is that reducing taxes on labor and capital
boosts economic growth by encouraging people to work harder and
invest more. Another plus is that carbon taxes would ideally
displace top-down command-and-control regulations such as the
Environmental Protection Agency’s new rules on electric power plant
emissions and subsidies to wind, solar, and bioethanol energy
production.

One big distributional concern, however, is that a carbon tax
falls more heavily on the poor since they spend a higher proportion
of their incomes on energy-intensive goods and services than do the
better off. One way to address the regressive distributional
consequences is a tax-and-dividend
proposal in which every American receives an equal share of the
carbon taxes collected that is deposited each month in their bank
accounts. While this idea addresses the concern about the
regressive nature of carbon taxes, it lessens the incentives that
offset taxes would provide for increased work and investment.

In terms of mitigating future climate change, a revenue neutral
carbon tax would encourage producers and consumers to economize on
energy produced by burning coal, natural gas, and oil that produce
climate-damaging carbon dioxide emissions. Boosting the price of
fossil fuels aims to enable actors in markets, not politicians and
bureaucrats, to pick the least costly ways to cut emissions. Taxing
carbon is also supposed to call forth innovation that would
eventually create low-cost no-carbon sources of energy.

This is precisely what the European cap-and-trade carbon market
was supposed to achieve. However, a 2011 report by the Swiss bank
UBS found that the European Trading Scheme had
cost European consumers $277 billion for “almost zero impact.”
This waste of money occurred because European countries issued far
too many carbon dioxide emissions permits so that their prices were
too low to encourage investment in energy innovation. In order to
avoid the European mess, the folks over at Carbon
Tax Center argue that a much higher carbon tax is needed. As an
example, they point to a 2009 bill sponsored by Rep. John Larson
(D-Conn.) which would impose an initial
carbon tax of $15 per ton and then increase it every year by
$10 t0 $15 per ton for the next 10 years. A carbon price of $120
per ton would add about $1 to the price of a gallon of gasoline and
5 cents per kilowatt-hour to the retail price of electricity.

It is likely that such a high tax would result in significant
carbon dioxide emissions reductions. But what might a U.S. carbon
tax by itself achieve with regard to altering the course of future
man-made climate change? Not all that much, argues Chip
Knappenberger, the assistant director of the Center for the Study
of Science at the libertarian think tank, the Cato Institute.
Knappenberger points out that the U.N. Intergovernmental Panel on
Climate Change (IPCC) projects an increase in global average
temperature of about 3 degrees Celsius by the end of this century.
Assuming the projected trajectory of overall global emissions by
all countries, if the U.S. were somehow to completely eliminate all
of its greenhouse gas emissions now that would reduce future
warming by only 0.2 degree Celsius by 2100. In other words, the
globe would warm by 2.8 degrees Celsius instead of by 3.0 degrees
Celsius.

So clearly if the projected damages caused by future man-made
warming are to be mitigated, most countries in the world would have
to adopt a carbon tax. A globally harmonized carbon tax would be
collected and spent by each country—there would be no international
tax financing any international agency. An advantage of carbon
taxes is that they function much like tariffs, which are much more
transparent than cap-and-trade schemes. In addition, countries that
do tax carbon could impose tariffs on goods imported from countries
that don’t so that their home producers are not disadvantaged by
high energy prices. But is it really feasible that most countries
in the world would adopt a carbon tax?

To get at this question, University of Sussex economist Richard
Tol has calculated what he evocatively calls the
Leviathan carbon tax. Tol defines his Leviathan tax as the
maximum carbon tax that is budget-neutral—that is, all other taxes
are reduced to zero and replaced by a carbon tax. The Leviathan tax
takes into account the carbon intensity of each country, meaning
the amount of carbon dioxide generated by every dollar of growth in
the economy. He finds that Nigeria and Liberia could finance their
entire government budgets with a $1 per ton carbon tax. Any more
than that would funnel more revenues into government coffers and
grow the size of their governments relative to their private
sectors.  

Tol uses World Bank
tax data that excludes taxes that directly finance
social security programs to determine the percent of GDP
paid in tax revenues to the U.S. government. Tol calculates that a
tax of $223 per ton of carbon dioxide could replace all revenues
derived from U.S. income and corporate taxes. To replace all tax
revenues, China would have to levy a carbon dioxide tax of $29 per
ton; India $45; Germany $267; Japan $450; and the United Kingdom
$855 per ton. In each case, collecting more violates revenue
neutrality and increases government tax revenues.

Tol then calculated what level a globally harmonized carbon tax
would have to reach to limit greenhouse gas atmospheric
concentrations (now 390 parts per million) to 650 ppm carbon
dioxide equivalent (CO2e), 550 ppm CO2e, and 450 ppm CO2e. The IPCC
argues that it will be necessary to keep greenhouse atmospheric
concentrations below 450 ppm in order to have at least a 50-50
chance of keeping the increase in global average temperature below
2.0 degrees Celsius. According to Tol’s calculations, that implies
a global $149 per ton carbon tax imposed beginning in 2015.

Imposing such a steep carbon in tax in countries like China,
India, Russia, and Indonesia would dramatically increase the
percentage of their GDP that flows into government coffers, which,
in turn, would greatly enlarge their governments. On the other
hand, if those nations did not collect a $149 per ton tax, it would
mean that other countries would have raise their taxes in order to
keep greenhouse gas concentrations below the 450 ppm threshold. By
the way, Tol calculates that a $149 per ton tax could replace
two-thirds of current federal income tax revenues in the United
States.

Assuming that man-made climate change is imposing damage and
costs on third parties, there is a strong libertarian case they
should be compensated. However, the preferred Coasean policy of
establishing and allocating property rights and then allowing
negotiations over proper compensation is impractical. If a carbon
tax is to be the next best alternative to a property rights regime
for mitigating harms caused to third parties by future climate
change, it should be revenue neutral and globally harmonized.

History reveals that the prospect of government fiscal restraint
in the presence of new revenue streams is not promising. For
example, Thomas Pyle, the president of the Institute of Energy
Research, has pointed out that the
top rate of the new U.S. income tax in 1913 started out at 7
percent, but under pressure of World War I reached 77 percent by
1918. In addition, Tol’s Leviathan Tax analysis suggests that it is
unlikely that a globally harmonized carbon tax is achievable. One
counter-argument is that if the U.S. and other developed nations
were to adopt a high carbon tax this could spur more rapid
technological development of cheaper no-carbon and low-carbon
energy technologies that poorer countries could then adopt to
leapfrog over further burning of coal, natural gas, and oil.

In 1988, Coase argued, “The fact that governmental intervention
also has its costs makes it very likely that most ‘externalities’
should be allowed to continue if the value of production is to be
maximized.” Considering how well governments afflicted by political
conflicts of interest, chronic corruption, and inherent
incompetence can be expected to execute a carbon tax, global
warming is likely just such an externality.

2013-01-16 14:45:18

Source: http://reason.com/archives/2013/01/16/should-the-us-adopt-a-carbon-tax-to-cont