A Carbon Tax Would Raise Unemployment.... NOT!

Yippie for David Kreutzer and Nicolas Loris at the Heritage Foundation for a value-laden, but economics-free issue brief that purports to debunk assertions being made that a carbon tax could be good for the economy, made by, among others, me and Yoram Bauman. I address Kreutzer and Loris's three arguments in turn:

1. A Carbon Tax Would Damage the Economy. There is no disputing their base assertions that a carbon tax would increase the cost of energy, and that energy makes up a larger fraction of a poor household's budget than a rich one's. But that completely assumes away the revenues of the carbon tax! Are they assuming, per their argument 3 below, that "[j]ust the sniff of a new revenue stream to the tune of hundreds of billions of dollars annually has the special interests in Washington running to Congress for more handouts"? Are they assuming that the revenues would necessarily be lost to special interest greed? If so, they should say so, instead of making it sound like a third, additional argument against a carbon tax. While residence in Washington, D.C. does of course breed appropriate skepticism about the destination of revenue streams, it seems a bit crabbed to also assume that a carbon tax could not possibly be revenue neutral. British Columbia's "revenue neutral" carbon tax, in fact, has the opposite problem: the provincial government takes in less in carbon tax revenues than it distributes (in the case of carbon tax-linked programs) or forgoes (in the case of lower income and corporate taxes). Besides, what is the logical extension of Kreutzer and Loris's argument? That we should not have any new tax whatsover, because the revenues would some immutable physical law be necessarily gobbled up by hungry special interest groups? Not even Grover Norquist takes such an extreme view, probably because he recognizes that a carbon tax distorts factor markets much less than payroll taxes or income taxes. See Parry and Williams for an analysis. In fact, a revenue-neutral carbon tax, by putting money back into the hands of consumers, would not damage the economy, but help it. See also a posting by James Handley at the Carbon Tax Center on payroll taxes and carbon taxes.

2. A Carbon Tax Would Not Save the Planet. Right on! We can't do things that don't save the planet! Everything we do must save the planet! And everything we do must kick the Chinese and the Indians into action! The problem with climate change is that, in order to reduce emissions, there are a lot of necessary, but not sufficient conditions. The U.S., and the world may never meet all of those necessary conditions. Fair enough. But unless someone starts somewhere, we are resigning ourselves to never doing anything to reduce emissions. Is that what the authors are saying? One important omission from this brief is the statement that climate change is a real risk, and that mitigation would, in the ideal world, be desirable. Do the authors believe that, or not? If so, this argument seems to suggest that we are just doomed, and we might as well hunker down and hope for the best.

3. Revenue Neutrality or a Regulations Swap is Unrealistic. Kreutzer and Loris quote Henry Waxman as saying "[b]ecause it's so complicated, I would not support preempting EPA. EPA can assure us that we can actually get the reductions we need." They conclude that carbon tax or cap-and-trade advocates like Waxman don't actually have any intention of abandoning command-and-control regulation of greenhouse gases under the Clean Air Act. Funny, if you check out Kreutzer and Loris's cite for that Waxman statement, it leads back to a National Journal blog post by Kreutzer. Did Waxman ever say this? I have been unable to find any other support for Waxman's quote. Besides, if you look a bit more carefully at the 2009 Waxman-Markey bill, it is quite clear that cap-and-trade was meant to displace command-and-control regulation under Title I of the Clean Air Act. See a Columbia Law School issue paper for credible analysis of the cap-and-trade bills.