The Carbon Tax Is Not a Charade: A Response to Oren Cass
Dear Mr. Cass,
I must confess to some disappointment – not at our disagreement on the question of carbon taxes, for which there is ample room – but at the road you have taken to reach your conclusions in The Carbon Tax Charade. Let me explain.
No one is more sceptical of the so-called science underlying the claim of the climate-change crowd that the globe is warming, and that the cause is carbon emissions. But unlike those who take such positions, I think it behoves those of us interested in energy and environmental policy to eschew certainty – climate-change believers just might be right, even though I believe they are most probably wrong. Leave certainty to those to whom climate change has become as much religion as science, and politicians who see that threat as an excuse to ramp up the level of government intervention in private life. Serious policymakers understand that decision-making under uncertainty is the normal environment in which they must operate.
No matter. First, areas of agreement.
I agree with you that the fact that several large energy companies’ “support for a policy is by no means an indictment per se”, although it is always a good idea to find out just who will profit from a proposed policy so as to ramp up skepticism if pecuniary motives are at play. The fact that the oil companies supporting a carbon tax have large natural gas reserves, a fuel they see as a substitute for coal, made me look harder at their position, as I am sure it did you.
I also agree with you that “big energy companies … benefit from a tax on fossil fuels,” in part, as you point out, because such a tax would further increase the competitive advantage these companies’ ample reserves of natural gas has over coal in many uses. But I fear that I cannot agree that a tax would increase the “cost” of fossil fuels. All costs that are not reflected in prices nevertheless exist. They are being borne by society. In the case of fossil fuels those costs include the billions we spend to meet the still-significant need to defend sea lanes on which we rely for imported oil despite our wonderful fracking revolution. The price we pay for oil is set in world markets and, as current experience demonstrates, the Saudis and other unpleasant and unstable regimes can determine how much we pay and therefore how fast we grow. To that defense cost, we must add the cost of any environmental externalities created by our use of fossil fuels.
What a tax would do is raise the price, not the cost, of fossil fuel consumption. The higher, tax-inclusive price would force consumers to bear the full cost of their consumption decisions, surely making for a more efficient economy, and a lower role for government, than we now have. With prices reflecting all of the costs involved in fossil fuel production and consumption, there would be no need for government subsidies to “level the playing field” on which fossil fuels compete with renewables. Or for regulations to direct consumer choices, producing a less efficient consumption pattern than reliance on economic pricing of energy would do.
I also wonder whether you have thought through your notion that a carbon tax is a “fine’, the payment of which would ease the consciences of producers of fossil fuels. If set correctly, and that will take some trial-and-error, the tax would merely force consumers and producers to internalize costs they are now imposing on others. That is definitely not a fine: it is an economic price. I have difficulty understanding why you object to a tax set to “compensate society” for the danger of climate change, or indeed any externality, because such a tax would allow anyone bearing the full cost of his decision to use as much fuel as he wishes. What is the alternative? Rationing? Arbitrary regulatory limits on production and use? Surely, on reflection, you will wonder whether you have inadvertently repudiated the market as the allocator of the nation’s resources.
Finally, it is not necessarily the case that a tax would fall most heavily on those least able to pay. The distributional consequences will depend on how the proceeds are used, the balance sought between equity and efficiency in making that decision, and the skill in implementing that decision. It is not necessary to “send a monthly check to every American.” Not when reductions in employee contributions to payroll taxes is an alternative.
Let me end with what might be a soothing reassurance: one need not buy into the idea that global temperatures are rising, or that any rise is caused by carbon emission, to favour a carbon tax. Think of it as a method of more efficiently pricing fuels, of a more equitable loading of the costs on the users and producers of fossil fuels, and as a source of income with which to relieve the tax burden on lower- and middle-income families. There is already a tax on carbon: it is being borne by society, rather than by the users of fossil fuels.
One has to admire the high standards Mr. Cass sets for a carbon tax, standards so demanding that if applied to other taxes none would pass muster. Of course social costs are difficult to measure; of course it is difficult to determine the level of the other features that would comprise a tax; of course experts will differ as to the exact structure of such a tax. But to abandon the effort to overcome those difficulties, even if imperfectly, is to turn the regulators loose with no limits on what they might do. An imperfect carbon tax surely is more efficient than an EPA that can do as it pleases, citing Mr. Cass to support its claim that it is impossible to quantify the cost of externalities.
I have rambled on for too long, but that is because I found your article so stimulating, for which I thank you.
Sincerely,
Irwin Stelzer
Irwin Stelzer is a contributor to Economics21.
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