“Carbon Taxes and Global Warming” (Roy Cordato’s 1992 insight for today)

By Roy Cordato -- April 6, 2015

[Editor Note: This excerpt from Dr. Cordato’s 1992 essay, “Excises, Social Costs, and the Myth of Efficient Taxation: The Case of Carbon Taxes,” (IRET Policy Bulletin), is a timeless, yet timely, refutation of the illusion of a science-based carbon tax (revenue-neutral or not). It is reprinted for the current debate with the permission of the author.]

“Politics have led to ‘calls for immediate action.’ The economics provide a pseudo-justification for such action by suggesting that if a social cost is generated, a tax is justified on economic efficiency grounds. This leads to contortions of the science such that only the scientific evidence and arguments that support the political ‘call for action’ enters into the analysis.”

A clear illustration of the myth of efficient taxation concerns recent interest in a tax on carbon-dioxide emissions. [1] These taxes would likely take the form of an excise tax on the production or use of fossil fuels, such as oil, gas, and coal. Many who participated in the U.N. sponsored “Earth Summit” on environmental issues advocate that such a tax be imposed by all nations. The rationale for such taxes stem from the alleged social costs that carbon dioxide (CO2) emissions generate in the form of global warming.

Whether any carbon tax would actually address a real social cost problem at all is highly questionable. In the scientific community, there is controversy with respect to every aspect of this issue. The policy maker faces daunting problems in attempting to formulate an excise tax that would efficiently address the alleged global warming problems created by CO2 emissions.

From the perspective of economic efficiency, the point of the tax is to force the generators of the social costs to incorporate those costs into their production decisions. This means that the policy maker must be able to specify and quantify the social costs of global warming and then formulate and impose a tax that accurately reflects those costs. Given the problems identified in this paper the impossibility of doing so should be obvious.

There are, however, additional problems that are specific to this case. First, there is no evidence that anyone currently living is bearing any costs associated with global warming, so that all of the discussion is in terms of future generations who will have to bear whatever costs there may be. Assuming for the moment that there actually are costs that current productive activity by its use of fossil fuels imposes on future generations, it should be clear that these costs would be impossible for any present-day policy maker to calculate.

Given the nature of opportunity costs, it is impossible to quantify social costs that are borne by people currently living. To calculate the efficient tax with regards to future social costs would require knowledge of the preferences of people who have not yet been born and the cost and production functions that relate to yet undiscovered technologies and unknowable future conditions of supply. This information would have to be known not just for fossil fuel markets but for all markets in the economic system.

Justification of new taxes must also explain why existing taxes on fossil fuels and other supply restrictions are not enough. The point of any tax on social-cost generating activities is not to reduce the social costs to zero, but to achieve the price-output combination that would result if the offending parties were actually bearing the costs and there were no other distortions in the economy. To show merely that some social costs are still present is not proof that more taxes are needed. Throughout the world there is extensive taxation of the use of fossil fuels. Taxes on gasoline range from 28 percent of the retail sale price in the U.S. to as high as 75 and 77 percent in Italy and France respectively. [2]

In addition, the U.S. government restricts exploration and drilling for oil in both Alaska and off-shore along both coasts. These taxes and restrictions cause supplies to be lower and prices to be higher than they would be in their absence. The question that must be addressed, but never is, is why are these very significant restrictions that already exist and the higher prices that they generate not enough to account for the social costs that the use of these fuels allegedly are, or will be generating? Indeed, none of these previous restrictions or taxes has been justified in accordance with the espoused economic theory, nor can they be.

We are assuming that a social cost problem actually exists, or will exist in the future. Whether any carbon tax would actually address a real social cost problem at all is highly questionable. In the scientific community, there is controversy with respect to every aspect of this issue. Whether global warming is actually occurring is in dispute. [3]

Second is the question of whether, assuming that global warming to some extent will occur, its consequences will actually be detrimental, that is, whether it will actually generate social costs. While some argue that global warming caused by increased levels of atmospheric CO2 and other greenhouse gasses will bring on droughts, floods, and even thawing of the polar ice caps, others argue that the effects will be beneficial. For example, it is argued that most global warming would occur at night, leaving day time temperature unaffected.

The implication of this is that growing seasons would be lengthened and allow for enhanced agricultural production in more northerly regions. In addition, increased CO2 in the atmosphere would enhance crop production and agricultural yields. According to Patrick Michaels, Professor of Environmental Science at the University of Virginia:

[I]t’s more likely that the way the enhanced greenhouse effect works is for night to warm up with little day warming…it’s pretty hard to melt the polar ice fields with any conceivable warming during polar night, and the growing seasons will be longer as nights warm. Drought frequency can decline if world precipitation increases, as long as summer days don’t warm much. Both have happened; in fact, summer days have cooled across our hemisphere over the period of reliable records. [4]

The point here is not to argue the scientific validity of any of these perspectives, but simply to point out that an excise tax is advocated as a remedy for a social cost problem whose mere existence is controversial. In fact, if global warming would actually generate social benefits then the same theory that suggests that a tax is the correct policy tool for the social cost scenario would imply that a carbon subsidy should be put in place.

The argument for such subsidies is symmetrical to the tax analysis and faces all of the same analytical problems. Of course, if both social costs and social benefits are generated, then both would have to be considered in any tax/subsidy solution. It is clear that none of these complications are part of the debate or are even being considered.

As noted above, whether or not a particular tax that is imposed is “efficient” is unverifiable. The entire framework of analysis then lends itself to simplistic assertions and ambiguous statistics. This not only opens the door for political manipulation of the economic “data,” but, in cases such as global warming and the imposition of a carbon tax where the economic data depend on information from the physical sciences, it enhances the politicization of all of the relevant scientific discourse.

If the political agenda calls for a tax on fuels that generate CO2 as a bi-product, the economic theory will supposedly justify that tax if it can be shown that the CO2 generates social costs. In order to demonstrate that these social costs exist, evidence from the physical sciences such as chemistry and climatology must be invoked. In such cases the empirically deficient economic theory provides the link that can lead to the politicization of the scientific evidence.

This politicization is demonstrated in a recent study conducted by the Congressional Budget Office on the economic effects of carbon taxes. [5] In an uncharacteristically candid statement for the publication, it pointed out that “there is great uncertainty about the extent to which … global warming is likely to occur, what its effects might be, and the costs of efforts to slow the progress of warming….” But it goes on to say that “its potential consequences have led to calls for immediate action.” [6]

The implication is that it is the politics not the science or economics that is driving the policy. But in spite of this acknowledgement, the underlying assumption of the study is not that the presence and effects of global warming are “uncertain,” as is noted, but that global warming is occurring and generating social costs which, by implication, justify a tax.

Throughout the document, global warming is referred to as a “problem” and as a “threat,” with no hint that this underlying assumption is itself controversial. Except for the above acknowledgement, found only in passing, the view of “investigators … concerned that rising concentrations of these gases, largely resulting from human activities, may cause an increase in the earth’s average temperatures that could have severe economic and ecological effects” [7] is implicitly accepted without question.

Politics have led to “calls for immediate action.” The economics provide a pseudo-justification for such action by suggesting that if a social cost is generated, a tax is justified on economic efficiency grounds. This leads to contortions of the science such that only the scientific evidence and arguments that support the political “call for action” enters into the analysis.

If different scientific evidence were emphasized, the economic analysis would change. The CBO study emphasizes mostly beneficial consequences, in terms of enhanced “energy efficiency,” from the imposition of fossil fuel taxes. But if it started with the opinion of scientists such as Michaels, who suggest that global warming may result in social benefits, not social costs, then the study would have to conclude that new fossil fuel taxes would impair economic efficiency and would have to go on to argue that existing taxes should be removed, or at least reduced.

As an aside, the CBO study makes no distinction between energy efficiency, the use of less energy per unit of output, and economic efficiency, minimizing the value of all inputs per unit of output. The strong implication in the CBO study is that any increase in energy efficiency is equivalent to an increase in economic efficiency. No justification is given for blurring this distinction, and none exists. While a tax on fossil fuels will increase the price of most energy inputs and therefore lead to a reduction in their use per unit of output, it will lead to an increase in the cost of production overall and therefore decrease economic efficiency.

As the prices of fossil fuel-related energy sources rise, there would be a tendency to substitute other energy and non-energy related inputs for the taxed energy inputs. The increase in demand for the substitute inputs would cause their prices to rise. The end result would be an overall increase in the cost of production that would impact on all production processes. Increased energy efficiency brought about by such a tax, not by technological advance, would result in a decrease in economic efficiency and reductions in living standards overall. The distinction between energy efficiency and economic efficiency is an important one to make, but is typically ignored, not only in the CBO study but in debates over energy policy in general.

———-

[1] For example see “Understanding the Economic Costs of Reducing CO2”, Testimony before U.S. Senate Committee on Energy and Natural Resources, by Roger C. Dower, World Resources Institute, Washington, D.C.

[2] James Tanner, “Carbon Tax to Limit Use of Fossil Fuels Becomes Embroiled in Global Politics”, The Wall Street Journal, June 9, 1992. (Original source, International Energy Agency.)

[3] See Patrick J. Michaels, “Apocalypse Not Now: Science, Politics, and Global Warming,” Policy Analysis, (Washington, D.C.: The National Chamber Foundation) 1992. See also John Shanahan, “A Guide to the Global Warming Theory,” Backgrounder No. 896, (Washington, D.C.: The Heritage Foundation), May 21, 1992.

[4] Patrick J. Michaels, “Smokescreen From the Greenhouse,” The Washington Times, June 18, 1992. [Editor note: The latest IPCC physical- science report (2013: p. 162) stated: ‘In summary, confidence is medium in reported decreases in observed global Diunal Temperature Range.”]

[5] Carbon Charges as a Response to Global Warming: The Effects of Taxing Fossil Fuels, Congressional Budget Office, 1990.

[6] Ibid., p. ix.

[7] Ibid.