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January 11, 2013

Heritage Foundation Weighs Impact of Carbon Tax

January 11, 2013
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In this forum, we have been discussing the serious problems with a carbon tax for years. For example, here is my study showing the weakness in the standard academic case for a carbon tax, and here is my study showing that the calls for a “revenue-neutral carbon tax swap deal” are very misguided. The Heritage Foundation has just released its own analysis, by David Kreutzer and Nicolas Loris, showing the negative impacts of a carbon tax, which should help the public keep perspective in this debate. Heritage details three main problems, which I’ll summarize in this post.

Carbon Tax Would Damage the Economy

No serious economist can deny that on its own terms a carbon tax would damage the conventional economy. When the advocates of a carbon tax speak of its ability to boost growth and/or efficiency, they are either including the quality of the environment as part of “the economy” and/or they are assuming that the carbon tax revenues would be used to offset other taxes. But to repeat, nobody can deny that levying a tax on carbon per se will reduce the total output of conventionally defined goods and services.[i]

Indeed, even the federal government’s own agency admits the serious economic costs, as the Heritage analysis relays:

In 2012, the U.S. Energy Information Administration (EIA) made a comparison analysis for a carbon tax that starts at $25 and rises by 5 percent per year (after adjusting for inflation). Compared to the baseline case, without the carbon tax, this would:

  • Cut the income of a family of four by $1,900 per year in 2016 and lead to average losses of $1,400 per year through 2035;
  • Raise the family-of-four energy bill by more than $500 per year (not counting the cost of gasoline);
  • Cause gasoline prices to increase by up to $0.50 gallon, or by 10 percent on an average gallon price; and
  • Lead to an aggregate loss of more than 1 million jobs by 2016 alone.

What should be even more disturbing to the progressive supporters of a carbon tax, is that it would have a disproportionate impact on low-income households, particularly those with long driving commutes. This is because the spike in electricity and gasoline prices would hurt their household budgets more than they would hurt those of “the 1%.”

A Politically Feasible Carbon Tax Would Not Significantly Mitigate Global Warming

The Heritage analysis next shows that the carbon tax under consideration—and the American public would not tolerate one significantly higher anytime soon—will not do much to serve its ostensible purpose, namely to mitigate human-caused climate change damages:

Unilaterally reducing greenhouse gases would not make a dent on global emissions and, consequently, would do next to nothing to reduce global temperatures. Even if the U.S. were to curb carbon emissions 83 percent below 2005 levels by 2050 (what cap-and-trade bills required), it would reduce global temperatures by only a few tenths of a degree Celsius by the close of the century.

This is because future carbon emissions will come overwhelmingly from the developing world (China and India, for example), which shows little appetite for squeezing economic growth for the sake of the environment.

This is the Achilles heel of a carbon tax, even if we stipulate the most alarmist figures about potential future damages. On its own terms, (manmade) global warming is a global problem, and thus unilateral action by the United States government will do little to solve the problem, even if it is as dire as some of the loudest voices warn us.

Significantly, when presented with the above types of arguments, now a standard reply from the advocates of a carbon tax is to argue that unilateral US action (or action by the US and Europe) will spur the development of very cheap, non-fossil-fuel alternatives, which China, India, and African countries will adopt because of the financial savings. This is the equivalent of a Hail Mary pass that the government itself admits will eventually cost American households more than one thousand dollars per year. Maybe we should come up with a new game plan?

The argument is even more strained when we think it through in terms of the situation with and without US participation in a carbon-tax regime. Currently, gasoline taxes and other regulations cause gasoline prices to be much higher in the rest of the world than in the United States, as a report last year documented:

In the U.S., gas prices average $4.19 per gallon, according to Bloomberg. In contrast, gas prices are $5.75 per gallon in Canada, $6.75 per gallon in Australia, $8.84 per gallon in the United Kingdom, and $9.35 per gallon in Italy.

These facts are often used by progressives to argue that the US is “undertaxed,” but they can also show that the cheap “green” technologies haven’t yet sprung into existence, despite many other people around the globe facing much higher gasoline prices.

It’s Naïve to Hope for Offsetting Reductions in Regulations or Other Taxes

Finally, the Heritage analysis explains that the promised efficiency gains from offsetting measures (once a new carbon tax is imposed) will never materialize:

Just the sniff of a new revenue stream to the tune of hundreds of billions of dollars annually has the special interests in Washington running to Congress for more handouts. Before carbon tax legislation has even been introduced, ideas on how to use the revenue already include income transfers, paying for defense spending cuts, reducing the deficit, transferring money to developing countries to adapt to climate change and the list goes on. History shows that any time more money comes into the coffers of the federal government, there is a political interest to spend it one way or another.

Some proponents of a carbon tax believe that the tax properly prices the externalities that vex opponents of fossil fuels and, therefore, eliminates the need for regulation of carbon dioxide. By this logic, cap and trade would also have eliminated the need for carbon regulation. However, instead of reducing regulations, the cap-and-trade bills would have added to them. For instance, the Waxman-Markey bill went on for nearly 700 pages before it even began the cap-and-trade section.


Anyone with the faintest understanding of how things actually work in Washington should realize that a carbon tax would constitute a net tax increase, and that the theoretically possible efficiency gains will not occur as promised. In reality, as the government’s own estimates show, a new carbon tax will significantly raise the cost of living for American households, and will not even do much to mitigate the ostensible problem of climate change.


[i] There are some Keynesian economists who might argue that during a large recession, a carbon tax will force businesses to invest in new technologies, thus spurring Aggregate Demand and lifting the economy into recovery. Even though I fundamentally disagree with this claim, that’s not the point here—once the economy is back to normal, even this analysis would have to admit that the carbon tax per se reduces conventional GDP and other metrics.

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