The myth of a cost-free carbon tax

A carbon tax would hurt.

And it would hurt by design. Carbon tax theory holds that human activity (like using the affordable energy from coal, oil, and natural gas) can be discouraged and comfortable habits (like driving our cars and machine-drying our clothes) can be broken through government price augmentation. Under a carbon tax, whether we are conscious of it or not, higher prices would coerce us away from our preferred choices. A carbon tax is a concealed stick with which government prods us in the direction it prefers.

Honest carbon tax advocates acknowledge this. They also believe that avoiding the costs of warming in the future would outweigh the harm done by a carbon tax today. And they are therefore willing to inflict that harm.

{mosads}But other tax advocates choose to deceive, peddling the myth of a cost-free carbon tax. The Climate Leadership Council (CLC) is one such outfit, promising that their carbon tax plan would be pro-growth and that two-thirds of Americans would directly benefit from a tax if the proceeds from it were to be handed back to the public equally in the form of monthly rebate checks.

Macroeconomic modeling and microeconomic reasoning, however, show that even with the rebate approach a carbon tax is a costly policy. A new study by Capital Alpha Partners, estimates how costly such an approach would be. In the modeled scenario that most closely mirrors the CLC plan, one in which emissions are taxed at an initial $40 per ton and revenue is redistributed in rebate form. The findings show sustained economic underperformance would cost us $2.8 trillion in lost GDP over 10 years. The study also foretells persistent employment woes, with a negative impact of more than 1 percent in the scenario’s early years and adverse employment effects continuing throughout the 22-year forecast period.

With its fixation on boosting aggregate demand, the CLC plan is nothing more than warmed-over Keynesianism, diverting wealth from its most productive uses and toward consumption in the near term. Alluring as a so-called rebate may be to many Americans, the Capital Alpha study suggests a carbon tax that recycles revenue by cutting checks to the public would result in economic harm.

To understand the full harm done we must think also of individuals’ qualitative evaluations of their own circumstances. To assert, as does the Climate Leadership Council, that some portion of the public would benefit from a complex trade off such as is presented by a tax-and-rebate scheme presumes more knowledge about the wellbeing of individuals than can validly be claimed. A carbon tax would affect the prices not only of fuel for transportation and electricity, but the prices of goods that rely on those fuels, like food and clothing. Calculating the loss of purchasing power caused by a carbon tax is challenging; calculating the loss of utility that results is insuperable. Even if we were nominally to have more money after the arrival of a rebate check than we would have had in a non-tax scenario, we cannot necessarily say we would be better off, because the opportunities before us would be altered — and not for the better. 

At the margin, the price increases caused by a carbon tax would mean fewer Sunday drives with our families, less accessible air travel, and dimmer nighttime cityscapes. A carbon tax would mean living with less. Some economists say living with less in this context is appropriate for achieving efficiency, but they overlook the subjectivity of economic value, which renders these experiences irreplaceable to some people.

The hidden cost — and the central purpose — of a carbon tax is that it uses prices to change the way we assess the range of possibilities before us. Are we better off with a government check in hand, but without the options we would otherwise have had?

The macroeconomic argument for a tax-and-rebate plan leaves much to be desired. But the microeconomic argument upon which the CLC plan implicitly rests is no stronger. If, through just institutions and deliberation, we decide that government action is required to reduce emissions, we ought take that action with full awareness of the consequences. A carbon tax, as a coercive measure imposed against our free choice on the market, suppresses economic activity and makes us worse off. A rebate check from Uncle Sam will not necessarily change that.

Jordan McGillis is a policy analyst at the Institute for Energy Research, a nonprofit focused on free-market energy and environmental research and policy.