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September 7, 2016

A Carbon Tax and “Pricing Carbon”

September 7, 2016
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At the Canadian Fraser Institute’s blog, economist David R. Henderson offers a short but refreshing critique of the euphemism “price on carbon.” In this case, Henderson was responding to Laval University economics professor Stephen Gordon, who argued in an op ed that conservatives in Alberta should support a carbon tax. But, as Henderson points out, Gordon tried to soften the rhetorical blow by initially referring to it as a “price on carbon.” In this post I’ll summarize Henderson’s objections to Gordon’s pitch.

Carbon Already Has a Price

First, Henderson makes the crucial but obvious point that carbon already has a price:

[C]arbon already has a price, or, more exactly, multiple prices. Natural gas has a price; oil has a price; coal has a price. And their prices are related to the valuable carbon component of those fuels because it’s carbon that makes those fuels valuable. Just as there’s no such thing as a free lunch, carbon is not free.

So why does Professor Gordon claim that taxing carbon means “putting a price on carbon?”

I can only speculate because I don’t know him, but here’s what I’m willing to bet dollars to doughnuts on: he calls a tax a price in order to lull the reader into thinking that it’s not a tax. Later in the piece he admits that it’s a tax but in his first mention, which sets the stage, he doesn’t.

Let me extend Henderson’s critique. Presumably Gordon would respond by saying, “Okay okay, I grant that carbon-rich fuels already have a price, sure. But what I meant was, we need the government to supplement the market price, with an additional charge reflecting the negative externalities of emitting more carbon dioxide and hence contributing to manmade climate change.”

Even here, the use of the word “price” is very misleading and inaccurate. A price refers to the amount of money voluntarily negotiated for payment when ownership of a physical good changes hands, or for the performance of a service. If the government is going to impose a “price on carbon,” then strictly speaking that would mean the government owns the atmosphere. Do people really believe that?

Besides the principle of it, using the word “price” is misleading in this context because there would be no genuine market, wherein a market price could be determined. Interventionists might argue that a cap-and-trade system would generate market prices for emissions, but here too the “supply” of trading permits would be completely arbitrary, set by government officials. In the Soviet Union they had “prices” announced by the central planning board, but in that institutional framework the “prices” didn’t perform the valuable social function as they do in a market economy.

What About a Carbon “Fee”?

We see similar rhetorical tricks in U.S. politics when, for example, the Libertarian candidate Gary Johnson was quite adamant that he had (briefly) flirted with a carbon fee, but he never ever supported a carbon tax. Yet libertarians of all people should recognize the danger here: If the U.S. federal government gets its foot in the door with a carbon “fee” initially calibrated to reflect the “social cost of carbon,” does anybody really think the government won’t game the calculations in order to boost revenue? Even if we stipulate the interventionist case for a carbon “fee” for the sake of argument, in practice it would soon devolve into a straightforward tax that was simply another device by which political officials could siphon trillions of dollars (over a ten-year period) from the public.

Henderson: A Carbon Tax Won’t Phase Out Other Regulations

After pointing out that carbon already has a price in the marketplace, Henderson goes on to challenge another plank in the case for a carbon tax. Specifically, Gordon had argued that conservatives should support a carbon tax because it would allow for the removal of more inefficient regulations. Henderson responded with some common sense:

If a carbon tax is implemented, it will likely be on top of the extensive regulation Canadians now contend with. Who’s offering to end regulation on carbon usage? Who’s offering to legalize certain kinds of incandescent light bulbs? Who’s offering to end the government’s mandates on energy efficiency in cars, trucks, washers, driers, refrigerators, air conditioners and other appliances? Who’s offering to get rid of expensive, market-distorting subsidies to solar and wind power? Anyone? Anyone? Bueller?

We see the same pattern with progressives in the United States. They are most certainly not agreeing that if conservatives or libertarians agree to a carbon tax, that they would concede the rollback of EPA regulations and other interventions. For just two examples, green groups in Seattle are actively opposed to an initiative for a revenue-neutral carbon tax (proposed by “standup economist” Yoram Bauman), while Paul Krugman recently pointed his readers to a series at Vox arguing that a carbon tax is not enough. In other words, David Roberts (the environmental economics expert for Vox) was telling his progressive readers that they should not fall for the economists who were saying “putting a price on carbon” would correct the so-called negative externality and then the magic of the marketplace would fix everything. No, even with a carbon tax, Roberts was telling progressives that they should still support top-down mandates and prohibitions on the energy sector, because of the threat of climate change.

Conclusion

In both Canada and the United States, there are a few analysts trying to convince conservatives and libertarians that they should support a carbon tax. In order to make the pill easier to swallow, they might refer to it as a “fee” or a “price,” and describe the act as correcting a defect in the market.

There are serious conceptual problems with such a case on its own terms; my co-authors and I summarize some of them in our Cato study. But even if we stipulate the theoretical possibility of a corrective “fee” to account for environmental damages, in practice this would simply be used by political officials to bilk the public for trillions more. Furthermore, it is particularly naïve to hope that the thousands of government employees in various departments, devoted to issuing, interpreting, and enforcing various regulations, would pack up and go home with the introduction of a “carbon price.”

If Canadians or Americans want to embrace a carbon tax, they should at least have an honest assessment of what’s in store. Promising “win-win” tax reform and a rollback of regulations ignores both the published literature and the discussion among environmentalists themselves.

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