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December 12, 2012

David Frum Ignores Economics in Support of Carbon Tax

December 12, 2012
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David Frum, one-time speechwriter for George W. Bush who has now been embraced by progressives for his willingness to throw former comrades under the bus, recently came out with a CNN article arguing the alleged virtues of a carbon tax. Now there are many economists who support a carbon tax, and they can make a coherent case; I’ve tackled one of their strongest proponents in this academic publication. But Frum’s article is no such worthy opponent; his case for a carbon tax relies on absurd arguments that only make sense if we believe consumers are completely helpless and need experts like Frum to run their lives.

Frum’s article is littered with so many dead ends that I can’t catalogue them all. Instead, I will select just a few of the biggest doozies and offer commentary:

Global emissions of carbon dioxide hit a record high in 2011, scientists from the Global Carbon Project reported last week.

Another record is expected in 2012.

The earth continues to warm, and to warm fast, with serious consequences for human life and welfare.

I’m not a climate scientist—then again, neither is Frum—but I can read a chart, and his statement about the rate of warming is misleading at best. Frum said the “earth continues to warm, and to warm fast,” but according to this graph from NASA, in 2011 mean global temperature was lower than it had been back in 1998, and even the five-year running mean has been stagnant for the last five years. This is not to say that the earth hasn’t warming since 1950 or since the late 1800s, but that was not Frum’s claim. Frum is saying that warming “continues” and the NASA data shows, at best, a warming pause.  Short of a sustained drop in global temperatures, the data could hardly be worse for Frum’s careless assertion. This is typical of his piece, which he presents as being part of the scientific and economic orthodoxy, when it is actually full of simply false assertions that more careful scholars wouldn’t endorse.

Yet Frum’s misleading statement about temperature trends is just a warm-up for his central argument, which he gets to later in the article:

Take three worrying long-term challenges: climate change, the weak economic recovery, and America’s chronic budget deficits. Combine them into one. And suddenly three tough problems become one attractive solution.Tax carbon.

A tax of $20 a ton, rising at a rate of 4% per year, would over the next decade raise $1.5 trillion, according to an important new study from the Massachusetts Institute of Technology. That $1.5 trillion is almost twice as much as would be recouped to the Treasury by allowing the expiration of all Bush-era tax cuts for upper-income taxpayers.

The revenues from a carbon tax could be used to reduce the deficit while also extending new forms of payroll tax relief to middle-class families, thus supporting middle-class family incomes.

Meanwhile, the shock of slowly but steadily rising prices for fuel and electricity would drive economic changes that would accelerate U.S. economic growth.

Now at this point the reader might be confused. How in the world would a $1.5 trillion tax on energy—which Frum himself describes as “shock” that would raise fuel and electricity prices—be construed as “attractive” with respect to the “weak economic recovery”?

This claim illustrates the new rhetorical ploy of proponents of a carbon tax. They know full well that Americans would not support a massive new tax on energy if it were sold merely as a way to avert global climate change—especially if Americans found out (not that Frum knows or would ever tell them) that most economic studies show climate change will shower net benefits on humanity for the next several decades.[i]

Consequently, the advocates of a carbon tax have tried to have their cake and eat it too. They tout the ability of a carbon tax to bring in more revenues (thus reducing the budget deficit) and provide pro-growth tax cuts elsewhere in the federal tax code. Thus it seems like a win-win-win: We save the planet, cut the budget deficit, and make everybody wealthier in after-tax terms.

There’s just one problem with this convenient narrative: It totally ignores what the actual peer-reviewed research says. A standard result in the environmental economics literature is the “tax interaction effect,” which I summarize in this article. In a nutshell, what happens is that even an “optimal” tax on an alleged negative externality such as carbon dioxide emissions can end up causing more economic damage than its environmental benefits, because of the prior existence of distortionary taxes. In other words, a pre-existing, inefficient tax code is a reason not to impose a new carbon tax.

Contrary to the claims of Frum, even if the government levied a new carbon tax and used all of its revenue to reduce other taxes, the conventional economy would probably suffer. The damage to the economy would be even greater if, as Frum suggests, some of the new carbon  tax is not revenue-neutral but instead is spent (i.e. used to reduce the deficit).

But we’ve saved the best for last. In grasping for arguments—no matter how absurd on their face—to support a carbon tax, Frum actually writes the following:

After five years of depression, the housing market is also ready for renewal. Again, Americans are waiting for market signals: Should they buy smaller houses nearer to work? High and rising fuel prices will encourage developers to build more mixed-use complexes that allow more people to live car-free: walking to work, entertainment, and shopping. The surest way to reduce fuel costs is to drive less.

The return to more urban living is a trend big enough to sustain America’s next great economic boom. To the extent researchers can measure, the daily commute appears to be the single worst recurring source of unhappiness in American life.

If changes in city shape can offer more Americans the opportunity to walk to work through an attractive shopping mall, rather than waste 50 minutes in a car in a traffic jam, those changes will advance human happiness, spur new construction work, and incidentally save the planet.

Putting aside the sophomoric rhetoric (“save the planet” when what Frum actually means is a theoretical reduction in net harms imposed on human beings starting in the year 2050 or so), the above passages are astounding in their naïvete. If Americans would be happier by living closer to big cities, then what’s stopping them from doing so right now? Do building developers and commuters really need David Frum to make gasoline artificially more expensive (via a carbon tax), before they take actions that are currently available to them and which Frum says will make them happier?  This central-planner mentality no doubt explains why progressives have warmed up to Frum.

In conclusion, there are sophisticated thinkers who have put forward coherent arguments for a carbon tax. I disagree with their conclusions, but we can have a serious debate. In contrast, David Frum’s latest article praising a carbon tax is full of bald assertions that defy not only climate and economic science, but also common sense.

[i] For more on what the peer-reviewed research says on the timing of alleged harms from climate change, see my discussion of Richard Tol’s 2009 survey article halfway down in this blog post.

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