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October 1, 2013

Australian Carbon Tax Study: Top Drawer Economics

October 1, 2013
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“Ray Kopp, an economist who directs the Center for Climate and Electricity Policy at Resources for the Future, said that the conclusions in IER’s [carbon tax] report ‘simply does not align with the bulk of analyses’ on carbon taxes. ‘Not to speak disparagingly of IER, but they are not going to get their stuff in the peer-reviewed literature,’ he added.”

– Evan Lehmann, “Energy Group Launches Political Attacks on Carbon Tax Supporters,” ClimateWire, September 5, 2013.

“Alex Robson has for the most part relied on standard textbook analyses of the effects of different types of measures to reduce CO2 emissions. He has also for the most part relied upon other authorities in the field …. I find the [IER] analysis quite standard, and I think that many of the seven lessons that Robson draws from Australia’s experience ought not be very controversial.”

– Peter Hartley, Mitchell Chair in Sustainable Development and Environmental Economics, Rice University (email communication, September 12, 2013).

Perhaps the critic did not really read the 50-page report. Perhaps he is not expert with Australia’s carbon tax regime, certainly an unhappy experience for its supporters. But whatever the reason, Ray Kopp of Resources for the Future went out of intellectual bounds with his charge that Alex Robson’s Australia’s Carbon Tax: An Economic Evaluation (September 2013) was not scholarly applied economics.

Professor Robson is an academic economist at Griffith University in Australia. His specializes in law and economics; applied microeconomics; public economics; and public policy. He is author of Law and Markets (Palgrave Macmillan) and numerous referred articles.

Kopp’s charge against Robson was reviewed by Peter Hartley, professor of economics at Rice University in Houston. Dr. Hartley holds the George and Cynthia Mitchell Chair in Sustainable Development and Environmental Economics and is a scholar at the James A. Baker III Institute for Public Policy.

Hartley found that Robson’s carbon-tax study “relied on standard textbook analyses” and “relied upon other authorities in the field.” He concluded: “I find the analysis quite standard, and I think that many of the 7 lessons that Robson draws from Australia’s experience ought not be very controversial.”

Here is Professor Hartley’s brief review of Robson’s seven points (in bold from the original study).

Lesson 1: In Assessing the Case for a Carbon Tax or Cap and Trade Scheme, Estimate the Incremental Net Benefits of All Feasible Policy Options, Rather than the Possible Costs of Climate Change

“The most important lesson he draws in my view is his lesson 1. In far too many analyses of this issue by economists the analysts have not estimated the likely incremental net benefits of all feasible policy options. In particular, the option of simply adapting to climate change is too often not even discussed. Do any of his critics say that economists ought not approach this question by undertaking an incremental cost benefit analysis of all feasible policy options?”

Lesson 2: Do Not Ignore the Effects and Costs of “Complementary” Policies, Which Are Likely to Result in Efficiency Losses Rather than Efficiency Gains, Compounding any Negative Effects of a Carbon Tax or Cap and Trade Scheme

“Lesson 2, that other policies can interact with a CO2 emission control scheme (whether tax or quantity-based) in undesirable ways is not really controversial among economists either. Indeed, it is commonplace to hear economists in Europe discussing how separate “complementary” measures (in particular renewable energy targets and subsidies of particular technologies) have been an important factor in leading to the collapse of their emission trading scheme prices, making the emission trading scheme ineffective at encouraging CO2 emission reductions.”

Lesson 3: Cumulative Economic Costs are Likely to be Substantial Over the Long Term, with Lower Discount Rates Resulting in Higher Cumulative Costs in Present Value Terms

“I guess one’s assessment of Lesson 3 might depend on the meaning one attaches to ‘substantial’. Really, I think the main point here goes back to Lesson 1. The costs, and benefits, of this scheme need to be compared to the costs, and benefits, of the alternatives, including adaptation to climate change no matter what the source (natural factors or CO2 emissions).”

Lesson 4: Fiscal Impacts are Likely to be Uncertain, with both Carbon Taxes and Cap and Trade Schemes Adding to any Existing Revenue Volatility

“Lesson 4, that taxing CO2 emissions will add to fiscal uncertainty, is supported by the arguments in the paper. The point again can be further illustrated using the European experience. The prices of emission permits in the EU have been quite variable suggesting that the revenue raised by an equivalent tax would also have been similarly variable.”

Lesson 5: Carefully Assess the Possibility and Costs of Carbon Leakage

“His lesson 5, that any attempt to impose controls in just one country is likely to be defeated by migration of industry to other countries, has long been debated in the literature. Do his critics think that all the economists who have contributed to the large literature on “leakage” of emissions in response to purely national emission control measures have been addressing a phantom problem?”

Lesson 6: The Double Dividend is Elusive

“Lessons 6 and 7 are really assertions about political economy more than standard economics.

Lesson 6 effectively asks us to consider whether, once politicians have their hands on a new revenue source, is it reasonable to conclude they will hand the revenue back in the form of reductions in other taxes, or will they instead find some worthy new expenditure program – even one that amounts to a new income transfer (which is not the same thing as reducing some other taxes)?”

Lesson 7: Establishing a Robust, Sustainable and Credible Carbon Tax is Politically Difficult. Policy Uncertainty and Time Inconsistency are the Norm Rather than the Exception

“Lesson 7 asserts that policies such as a new tax are unlikely to be stable and credible unless they have very strong public support. Since these final two lessons are not necessarily an implication of standard economic analysis, I would concede they are likely to be more controversial among economists than lessons 1–5.”


The ball is in Ray Kopp’s court to offer an in-depth contrary analysis of Australia’s carbon-tax experience–or walk back his charges that Alex Robson’s study was of poor quality and fringe to the intellectual debate. Until this is done, Robson’s Australia’s Carbon Tax: An Economic Evaluation stands as a serious study of the real-world shortcomings of carbon-dioxide mitigation policy.

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