“A carbon tax of over $300 per ton would be necessary to reduce emissions to an annual rate consistent with stabilizing the concentration of carbon dioxide in the atmosphere.”
“A number of leading economists … have made an effective case that the net cost of emissions controls could be much reduced by using the revenues from such taxes … to reduce the more misallocative provisions of our current tax code…. They are correct to make this point, but this is primarily a case for tax reform, not a case to finance this reform by large tax increases on fossil fuels.”
– William Niskanen, Fall 1997
This excerpt in our series comes from Niskanen’s essay section, Would Governments Approve Effective Control Measures? The previous posts are listed in the footnote. [1]
The record to date does not provide a basis to expect the major governments to approve effective measures to control carbon dioxide emissions. The U.S. record is most important, because no international agreement would be effective without full U.S. compliance.
For many years the U.S. government, almost alone among the rich countries, has resisted an increase in the gasoline tax to a level higher than necessary to finance highway expenditures. In 1993 President Clinton’s proposal for a general Btu tax was not approved by a Congress controlled by his own party. More important, in July 1997 the U.S. Senate approved a resolution by a vote of 95 to 0 opposing any global warming treaty that exempts the poor countries from emissions controls or that would seriously harm the U.S. economy.
The types of measures that could provide effective control of carbon dioxide emissions include the following:
Any of the first three measures would also be the most efficient means to achieve effective emissions control.
The first step toward understanding the politics of this issue is to recognize the magnitude of the potential changes. A tax of about $100 per ton of carbon dioxide emissions would be necessary to eventually reduce annual emissions by 40 percent relative to the projected baseline path, roughly the amount necessary to meet the target proposed by the European Union to reduce emissions to 15 percent below the 1990 level by 2010.
This would increase the minemouth price of coal by nearly 300 percent, the wellhead price of natural gas by nearly 100 percent, and the wellhead price of oil by nearly 75 percent. Such taxes would yield revenues to the U.S. government of over $200 billion a year. Nor is this the likely limit; a carbon tax of over $300 per ton would be necessary to reduce emissions to an annual rate consistent with stabilizing the concentration of carbon dioxide in the atmosphere.
Taxes of this magnitude would substantially change the composition of the U.S. economy and reduce economic growth, costs that would be amplified by the interaction with the current structure of U.S. taxes. Congress deserves much more accurate answers to the questions addressed above before it commits us to start down this path.
A number of leading economists, including Dale Jorgenson, have made an effective case that the net cost of emissions controls could be much reduced by using the revenues from such taxes (or from auctioned permits that would reduce emissions by the same expected amount) to reduce the more misallocative provisions of our current tax code, especially the high marginal tax rates on the income from capital. They are correct to make this point, but this is primarily a case for tax reform, not a case to finance this reform by large tax increases on fossil fuels.
The choice between a carbon tax and a system of auctioned emissions permits involves only a minor political issue: A carbon tax leaves some uncertainty about the magnitude of the emissions effects, whereas permits focus the remaining uncertainty on the relative price effects.
There is a much more important political issue in the choice between either a carbon tax or auctioned emissions permits and a system of permits that are “grandfathered” to current fuel users. The first two measures each would involve a massive wealth transfer from the suppliers and consumers of fossil fuels to those who would benefit from an increase in government spending or a reduction in taxes.
These measures would create two political effects that would be minimized by choosing a system of grandfathered permits: Opposition by the suppliers and consumers of fossil fuels may defeat or defer the appropriate measures to control carbon dioxide emissions, and the expected revenue from these measures may bias the government’s decision the level of tax rates or permits.
On the other hand, a system of grandfathered permits would not generate revenues that could be used to finance a major tax reform, but it is probably unrealistic to expect government to use the revenues in this way rather than to compensate some of the losers from the emissions control measures or to reward other favored constituencies.
Whatever the merits of the case for controlling carbon dioxide emissions, there are no good arguments for using regulatory measures for this purpose. Such measures are grossly inefficient, often arbitrary, and are likely to be insufficient to achieve the desired emissions reduction. The U.S. Environmental Protection Agency, however, has apparently considered a variety of regulatory options to reduce carbon dioxide emissions, some of which the EPA may have the authority to implement without new legislation.
A regulatory approach to this issue should be dismissed out of hand. The case for a global warming treaty is weak enough without burdening it with the least efficient of the alternative control measures.
In summary, the politics of global warming suggest that governments are unlikely to choose the appropriate type and level of control measures.
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[1] The previous entries in this series are: