The Unserious Case for CO2 Taxation Domestically and at the Border (Zycher in 2017 for today)

From MasterResource

By Robert Bradley Jr. — August 24, 2023

“The border tax adjustment would be hugely complex given the international supply-chain system, leading to an increase in the attendant bureaucracy even if the regulatory bureaucracy is reduced in size.”

“The CLC proposal is poor conceptually and deeply unserious.”

Six years ago, economist Ben Zycher, the John Searle chair at the American Enterprise Institute (AEI), published an analysis that rings true today–if not more true. “The Deeply-Flawed Conservative Case for a Carbon Tax,” subtitled “’Conservatives’ Endorse the Broken-Windows Fallacy, Reject Evidence and Rigor,” outlined the arguments that once-proud Resources for the Future would not.

Zycher’s piece employed Economics 101 to refute a proposal from the Climate Leadership Council, the Baker-Shultz ‘Carbon Dividends Plan’, that attempted to fool Republicans and conservatives that carbon dioxide (CO2) was a pollutant that the U.S. could tame in an international setting. It got nowhere. (Also see Zycher’s post at MasterResource, Climate Leadership Council on Defense). [1]

Excerpts from Zycher’s AEI March 2017 piece follow.

Summary

The Climate Leadership Council last month proposed a gradually-increasing carbon tax on greenhouse gas emissions, with the revenues to be distributed as “dividends” to all Americans. It proposes also border adjustment rebates and fees for exports and imports to and from foreign markets without equivalent tax policies; and a significant reduction in the existing regulations limiting greenhouse gas emissions, but with an overall reduction in emissions below those incorporated in the current regulatory regime.

Virtually all of the CLC assertions in support of its proposal are incorrect or implausible. The CLC provides no evidence that climate risks are “too big,” and assumes that the proposed tax would provide “insurance” without examining the future climate effects of its proposal. The argument that an emissions tax is a more efficient method of reducing emissions relative to regulations is not correct. The “dividend” proposal is naïve in that it ignores the coalition problem in Congress, and the relative influence of concentrated and unconcentrated pressure groups. The border tax adjustment would be hugely complex given the international supply-chain system, leading to an increase in the attendant bureaucracy even if the regulatory bureaucracy is reduced in size.

Contrary to its assertions, the CLC proposal would increase the government allocation of resources, and thus the size of government. And the premise that the proposal will strengthen the economy by engendering new investment in unconventional energy is a classic manifestation of the broken-windows fallacy. Because the proposal would increase energy costs with no environmental benefits, the economy in the aggregate would be smaller. The CLC misrepresents the findings of a Treasury Department study; after accounting for employment and wage effects, the bottom 70 percent of the income distribution are unlikely to find themselves better off.

The gradually-rising tax eventually would yield declining revenue, and there is no easy option for preserving the dividend payments. And the CLC refutes its own claim of policy “predictability” by proposing after five years a Blue-Ribbon Panel that could recommend an increase in the tax rate. The CLC proposal is deeply unserious.

Zycher takes on and refutes the eight arguments presented for climate statism:

• The “evidence of climate change is growing too strong to ignore” and “the risks associated with future warming are too big and should be hedged.”
• The rising carbon tax would provide “an insurance policy.”
• “Economists are nearly unanimous in their belief that a carbon tax is the most efficient … way to reduce carbon emissions.”
• “All the proceeds from this carbon tax would be returned to the American people on an equal… basis” as “dividends.” 
• There would be a repeal of the Clean Power Plan and a phase-out of “much” of the other Obama climate regulations, with a tax-induced increase in emissions reductions below that attendant upon the Obama regulatory regime, so as to “sustain a bipartisan consensus.” In addition, a “border carbon adjustment” would engender a level playing field between U.S. exports and imports: rebates to exports and fees imposed upon imports respectively to and from countries failing to impose such a tax, with the fees increasing the dividends paid to “the American people.” 
• The combination of the “dividend” and regulatory reduction policies would shrink “the overall size of government.”
• A carbon tax would encourage technological innovation, and a “large-scale substitution of existing energy and transportation infrastructures, thereby stimulating new investment” [and providing] “predictability” for the private sector.
• “The bottom 70% of Americans would come out ahead under such a program.”

Conclusion

The CLC puts itself in a curious position by arguing that command-and-control regulation of GHG is growth-inhibiting, but a carbon tax yielding even greater emissions reductions—energy even more expensive—would strengthen the U.S. economy. Note again that the CLC carbon tax rises over time. At some point along the relationship (“Laffer curve”) between the tax rate and revenues, there is a revenue-maximizing tax rate, and at higher tax rates, revenues fall. Precisely how will the dividend mechanism compensate Americans for higher energy costs then? The CLC cannot answer that demand conditions at that high tax rate might be relatively “elastic” (greater than one in absolute value) so that energy spending would fall. After all, if we simply prohibited the use of conventional energy, such spending would be zero, but the cost of such a policy would be enormous.

If the CLC answer is to lower the tax rate, then the advertised “predictability” of the tax/dividend policy is an illusion. If the answer is additional funding from other revenue sources, then the already-dubious argument that this proposal will shrink “the overall size of government” (see section VI above) will come a cropper. Either other programs will be cut to pay for the carbon dividend—not a wise bet—or other taxes will be increased, or federal borrowing will rise. Such are the fruits of a failure to think through the public choice dimensions of policy proposals.

The CLC proposal simply accepts the dominant argument on the effects of increasing GHG concentrations while offering no evidence at all. It makes an insurance argument without doing the most basic of benefit/cost analyses: What future temperature and climate effects would the proposal yield? The assertion that a tax is a more efficient policy tool than regulation is not defended other than with an appeal to a consensus among economists, a consensus that is real but irrelevant in that it asks the wrong question.

The assumption that political competition will return the tax revenues to “the American people” is deeply dubious, and the CLC offers no arguments as to why that would prove to be a political equilibrium. The combination of the proposed phase-out of the Obama regulations and the border adjustment rebate/fee is likely to increase resource allocation by government, and the dividend policy is a new spending program notwithstanding the effort by the CLC to obfuscate that reality.

The CLC actually argues that destroying part of the economic value of the existing energy capital stock and forcing new investment flows into alternatives will yield a bigger economy; that is the broken-windows fallacy in all of its glory. And the CLC reports the findings of a Treasury Department study incorrectly; given the strong complementarity between energy consumption and employment, the conclusion that the tax/dividend policy would make the bottom seven deciles of the income distribution better off is highly problematic.

The CLC proposal is poor conceptually and deeply unserious.

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[1] The Climate Leadership Council purchased ($$) two bigwigs from the Reagan era to try to sell a CO2 tax. James A. Baker’s consulting shop received a big payday. (He did not wake up one morning in a climate sweat, and climate alarmists at the Rice University’s Baker Institute worked on him as well.) On Baker’s partner, see George Shultz’s Climate Activism: A Note.

Marlo Lewis has also surveyed the problem of fake conservative and free market groups (R Street; Niskanen Center) in the quest for pricing carbon dioxide.