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March 26, 2015

Jerry Taylor Shows the Weakness of Case for a Carbon Tax

March 26, 2015
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In a new study from the Niskanen Center, its president Jerry Taylor outlines “The Conservative Case for a Carbon Tax.” Ironically, the study doesn’t spend much time explaining why a carbon tax is good, but instead rests entirely on the promise that the government will stop doing awful things if only conservatives will agree to a carbon tax. Beyond that, Taylor tries to defuse carbon tax objections that we here at IER have raised, but his defenses are inadequate. Finally, in an ironic twist, some of the conservative (and libertarian) heroes that Taylor cites, actually reject the very types of policies he recommends in the study. It’s good that Taylor published the study, because its analysis should underscore for conservatives the crushing flaws of a carbon tax, whatever his original intent.

Taylor’s Trump Card: Feds Are Going to Restrict Carbon Emissions No Matter What

The one trump card that Taylor plays throughout his study is that the federal government is going to regulate carbon dioxide emissions one way or another as part of its attempt to mitigate climate change. If it’s not through a carbon tax, then it will be through heavy-handed “command-and-control” regulations, such as CAFE fuel efficiency standards on vehicles, and the EPA’s regulations on coal-fired power plants and other sources. Therefore, conservatives need to quit whining about how they don’t think a carbon tax is good for the economy, because they’re missing the point. Here’s Taylor in his own words, after he first documents the various ways that conservative Republicans will not be able to roll back federal energy regulations:

Even were conservatives to eliminate federal action to address climate change, states would remain free to act. Presently, there is a cap-and-trade program in California and a regional cap-and-trade program across nine Northeastern states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, Rhode Island, and Vermont). A federal regulatory retreat on greenhouse gas regulation would likely trigger further increases in regulation at the state level.Moreover, there is a plethora of piecemeal regulatory interventions to reduce greenhouse gas emissions at both the federal and state level. Renewable energy portfolio standards, green energy subsidies, and energy efficiency standards are but a few of the costly programs that are, in part, justified by concerns about global warming.Hence, the political question is not whether government should act to control the emission of greenhouse gases. That question has been settled for the foreseeable future. The relevant political question is how government should control greenhouse gas emissions. [Taylor, pp. 7-8, italics in original.]

This argument is exceedingly strange for a conservative to make, since conservatives generally favor federalism, rather than federal preemption. In any event, Taylor is not giving the full picture of what is happening with climate change policy at the state level, when he writes that “a federal regulatory retreat on greenhouse gas regulation would likely trigger further increase in regulation at the state level.” This statement may be true for states like California or New York, but the appetite for cap-and-trade and other GHG regulation in the states generally has been shrinking, not expanding. The Regional Greenhouse Gas Initiative (made up of Northeastern and mid-Atlantic states) is continuing, but the Western Climate Initiative (made up of Western states) was started in 2007, but now only retains California. A similar situation is true with the Midwest Greenhouse Gas Reduction Accord (made up of six Midwestern states); the group proposed a cap-and-trade plan in 2010 and has taken no action since then.

Not only are states pulling back on cap-and-trade plans, but they are pulling back and freezing state renewable electricity mandates. Last year Ohio froze their mandate and this year West Virginia rolled their mandate back. We should also consider state pushback on the EPA’s proposed regulation of GHG emissions from existing power plants.

But putting aside Taylor’s misreading of what is happening in conservative-leaning states, we can turn his own logic against him. Taylor can’t promise conservatives that if they would only agree to a federal carbon tax, then the environmental Left would agree to roll back the command-and-control regulations currently in existence. After all, Taylor himself just argued that a “federal regulatory retreat on greenhouse gas regulation would likely trigger further increases in regulation at the state level.” So if conservatives—according to Taylor’s case—don’t have the power to keep states from implementing inefficient regulations, how can Taylor possibly promise them that any carbon tax deal would be honored?

Although he doesn’t come out and say it, Taylor’s argument here rests on the belief that the hodge-podge of energy interventions currently exist because the Left really wants to limit carbon dioxide emissions, but gosh darn it those stubborn conservative Republicans are taking the efficient “market solution” of a carbon tax off the table, leaving only direct regulation. Taylor needs such a belief for his argument to work. The only reason we could possibly expect the environmental Left to honor a carbon tax deal, is if they said, “Phew! Now that we have an adequate mechanism in place for bringing emissions down to their socially optimal level as the economists inform us, we can decimate the EPA and tell everybody working at the Department of Energy to get a real job.”

Does Taylor actually believe that? What would William Niskanen have to say about the prospects of getting rid of huge bureaucracies once their apparent mission had been accomplished?

In fact, we don’t have to speculate about whether all of these energy interventions are really about mitigating damage from human-caused climate change. Taylor himself provides us all the evidence we need. He informs us that “EPA’s proposed regulations for new coal-fired power plants…dictate carbon capture and storage technology that reduces CO2 emissions at a cost of $88-$131 per ton,” and he reminds us later of “the agency’s estimate of the social cost of carbon emissions in 2030: $17 per ton using a 5 percent discount rate, $55 per ton using a 3 percent discount rate, and $85 per ton using a 2.5 percent discount rate” (Taylor pp. 3-4). In other words, EPA is proposing regulations that will cause more harms than benefits, even using EPA’s own numbers for the benefits of emissions reductions.

I hope the reader can appreciate just how odd an argument Taylor is trying to make here. He thinks that he is making a good case for a carbon tax deal, by showing conservatives just how senseless and inefficient the current regulatory apparatus is. But on the contrary, Taylor is revealing that federal regulators aren’t interested in achieving “efficient” emissions control and that they are not opting for a “second-best” solution (which is supposedly necessary because those obstinate Republicans have taken the best tools away from them). According to Taylor’s own numbers, EPA is currently intervening in the energy sector in ways that are worse than doing nothing. How in the world is this an argument for conservatives to strike a deal with these people, in the name of achieving economic efficiency? If conservatives—per Taylor’s argument—don’t have the political power to implement policies that actually make sense, why would conservatives be able to hold the Left to a deal once a new carbon tax was installed?

Taylor’s Suggested Tax Swap Won’t Help the Economy

Informing his readers that Adele Morris is the “center of political gravity” in the Washington, DC carbon tax policy community, Taylor highly touts her carbon tax plan, as laid out in a Brookings Institution study. Over a 20-year horizon, the plan would raise $2.7 trillion in new revenue for the federal government, of which $405 billion would be used to compensate low-income households for higher energy prices, $1.6 trillion would be devoted to corporate tax rate reduction, and the remaining $695 billion would go to deficit reduction. In addition, Morris claims that the new carbon tax would allow for a reduction of $120 billion worth of “clean energy spending.”

It is worth noting several things about this allegedly ideal carbon tax plan: First, it is not revenue neutral; over 20 years, it brings in (at least) an extra $695 billion in net new revenue to the Treasury. Second, using the very type of impact analysis that the Niskanen Center’s carbon tax expert endorsed in a recent post, we can conclude that Taylor’s preferred plan would slow U.S. economic growth, at least looking just at the fiscal provisions. This is because direct payments to households, rather than reductions in marginal tax rates, are not nearly as effective as a supply-side cushion to a new carbon tax. Only if all of the new revenue were devoted to corporate tax relief, could we even hope for an economic boost.[1]

To his credit, Taylor himself does not press the “win-win” argument that was fashionable for a while, in which some analysts told conservatives that even if they didn’t believe global warming was a problem, that they should support a carbon tax so long as it was used to reduce other taxes. Although he doesn’t trumpet the issue, Taylor acknowledges (on p. 16) with his brief remarks and a footnote citation the literature on the “tax interaction effect.” I have explained this phenomenon in detail elsewhere, but the quick summary is that the more distortionary the pre-existing tax code is, the weaker is the case for imposing a new carbon tax (under general conditions), even if its revenues are used 100% to offset the pre-existing taxes. The explanation for this counterintuitive result is that the carbon tax “interacts” with the original taxes, and will probably make them more economically harmful even when their rates have been reduced to fully maintain revenue neutrality.

Finally, we note the naïvete of the Morris proposal. Does anyone seriously believe that not a dime of $2.7 trillion in new federal carbon tax revenue will be used to increase federal spending on “green” projects? Will thousands of federal employees associated with direct energy regulations really be laid off, once the “market solution” has been installed—especially considering that the original rationale for many of these regulations (such as fuel economy standards in vehicles) had more to do with conservation rather than climate change worries?

Taylor Fails to Handle IER’s Objections

Taylor pays us here at IER tribute by explaining in footnote 66 (p. 18) that a “representative summary of the conservative argument against carbon taxes” can be found in the Institute for Energy Research primer titled, “Carbon Taxes: Reducing Economic Growth – Achieving No Environmental Impact.”

The reader will not be surprised to hear that I do not find Taylor’s responses persuasive. In the interest of brevity, I’ll deal with just some of the objections and responses below.

Unilateral U.S. Action Won’t Put a Dent in Global Warming

For example, Taylor doesn’t dispute the crucial point that unilateral U.S. action against carbon dioxide emissions will have a negligible impact on global temperatures by the year 2100, and he doesn’t even put much emphasis (as many others carbon-tax supporters do) on the claim that U.S. leadership will bring others to the table. Instead, Taylor simply tries to play his trump card again:

Regardless, a carbon tax does not introduce this issue to the climate policy debate. The United States is already acting unilaterally to reduce greenhouse gas emissions outside of a global agreement. Our political commitment to unilateral action, as noted above, appears to be irrevocable. If the United States is going to act unilaterally, better that it do so at the least cost possible.

To make sure everyone understands what Taylor is saying here: It’s not the case that conservatives should support a carbon tax out of a desire to reduce dangerous greenhouse gas emissions; Taylor admits that “it is unclear to what extent U.S. leadership might encourage other nations to act,” though he does think that nations can agree to tax themselves more readily than they have agreed to install cap-and-trade programs on themselves.

Rather than arguing that a U.S. carbon tax will lead to a global agreement which will then avert dangerous climate change, instead Taylor ends this section by saying the U.S. is unilaterally cutting back emissions anyway, and so we might as well go along with his idea for a carbon tax deal. That is hardly an adequate response to those (like us here at IER) pointing out that a U.S. carbon tax doesn’t even remotely address the climate change fears that its proponents bring up, which is (supposedly) the whole reason we’re even having this discussion.

Once Installed, a Carbon Tax Will Increase the Size of Government

Taylor acknowledges the danger that even if there is initially an “efficient” deal that makes the new carbon tax appealing, who is to say that federal policymakers will respect the deal decades into the future? Once they see this new source of revenue, won’t federal officials increase the carbon tax well above what the economists tell them is the “optimal” level? Moreover, as I explained in my Senate testimony, there are several fudge factors that allow an analyst to generate a “social cost of carbon” over a huge range of dollar estimates.[2]

Here Taylor’s response to such concerns is astounding. He writes:

Many conservatives resist carbon taxes because they believe that increases in federal revenues will increase the size of government. But virtually every proposed carbon tax put on the political table includes offsetting tax cuts to ensure revenue neutrality. Revenue neutral carbon taxes will not increase the size of the federal treasury. [Taylor p. 21]

Contrary to Taylor, I can think of one proposed carbon tax that is not revenue neutral—namely, the proposal from Adele Morris that Taylor endorsed five pages earlier in his paper. As Taylor explained to us, “Morris calculates that her carbon tax would bring in about $88 billion in the first year, rising to $200 billion a year after 20 years, and provide a net deficit reduction of $815 billion over that period” (p. 17). The way Morris’ carbon tax proposal reduces the deficit by $815 billion is that it constitutes a net tax increase of (at least) $695 billion.[3]

Besides the fact that Taylor himself just got finished proposing a carbon tax that would not be revenue-neutral, we can look at other U.S. examples. For example, Governor Jay Inslee of Washington State has proposed a cap-and-trade program (though it is sometimes simply called a carbon tax), in order to fund a $12.2 billion transportation bill. Similarly, the state of California has used some of its cap-and-trade revenues to fund its high-speed rail project. A website devoted to the Regional Greenhouse Gas Initiative (RGGI)—a cap-and-trade program for Northeastern and mid-Atlantic states—boasts about the various “green investments” on which its funds have been spent. We also have the experience of Australia with its carbon tax—none of the promises that Taylor makes to Americans came true in that country, as this study by Australian economist Alex Robson documents. (As this blog post was being published, two news stories broke to further illustrate the danger in giving governments access to new revenues–one in New York and one in Illinois.)

Later in his study Taylor brings up a different argument to soothe conservatives’ fears over opening the door to a new carbon tax:

But conservatives have less reason to fear runaway taxation than they have to fear runaway regulation. It is more difficult to increase taxes than to increase regulation because the former imposes politically visible costs while the latter imposes politically invisible costs. Public opposition to tax increases—and corresponding support for increased regulation—is well known. [Taylor p. 25]

Taylor is right that the public opposes explicit tax hikes more than new regulations; this is one reason that Taylor’s proposed deal to eliminate energy regulations in exchange for a carbon tax is dangerous—regardless of what the initial deal required, the regulatory authority could simply be phased back in over time, with little public resistance.

However, even though the public resists tax increases, that hardly eliminates the threat of runaway growth. For example, as I explain on pages 24-29 of this IER study, when the modern federal income tax was first introduced in 1913, it was sold as a very light tax on the super-rich, which would allow for the government to reduce tariff rates. Believe it or not, some of the supporters of the new federal income tax argued that it would restrain government spending, because the tax would fall directly on the public who would thereby be interested in economical government.

Needless to say, these promises were soon dashed. The top income tax rate in 1913 was 7%. A mere five years later, because of the massive spending of World War I, the top income tax rate had risen to an astounding 77%. Ironically, the monster unleashed in 1913—the federal income tax—is now one of the chief arguments in favor of a new federal carbon tax. The people (like Taylor) assuring Americans that a new carbon tax will make government leaner—if they get their way—will look as naïve to future Americans as those pushing the income tax in 1913 look today.

Taylor’s Icons Turn Against Him

Although it’s not directly related to the merits of the case for a carbon tax, it is worth mentioning that some of the conservative (more accurately, libertarian) heroes that Taylor cites in favor of his position, have actually written things that are quite awkward for anyone favoring a federal carbon tax. With each of the three figures I discuss below—namely William Niskanen, Milton Friedman, and Murray Rothbard—we can’t know for sure what their stance would be today, since they have left this world. But I’m going to produce some quotations that place the burden of proof on people like Taylor if they want to keep claiming these thinkers in the carbon tax camp.

First, there is William Niskanen, the famous economist for whom the Niskanen Center is named. In a previous post I explained Niskanen’s pioneering efforts in “Public Choice” economics, and why Niskanen’s insights into the nature of the federal bureaucracy made me so skeptical about promises that a massive “carbon tax deal” would sweep the onerous regulations away.

In the present post, I’ll reproduce an amazing quotation from a 1998 Cato essay, in which the author quoted then-Cato president Niskanen’s views on the Kyoto Protocol, and then offered his own commentary:

Yet before the public and policy makers sign off on the Kyoto Agreement and embark on an aggressive plan to reduce greenhouse gas emissions, it would be well advised to pause for a moment and think long and hard about the wisdom of any such international accord.

As Cato Institute chairman William Niskanen has noted, for any international action to merit support, all of the following propositions must be proven true:(1) A continued increase in the emission of greenhouse gases will increase global temperature.(2) An increase in average temperature will generate more costs than benefits.(3) Emissions controls are the most efficient means to prevent an increase in global temperature.(4) Early measures to control emissions are superior to later measures.(5) Emissions controls can be effectively monitored and enforced.(6) Governments of the treaty countries will approve the necessary control measures.(7) Controlling emissions is compatible with a modern economy.

So as to dispel the suspense among his readers about what to think of this list, the writer of this Cato piece then went on to say, “The case for any one of those statements is surprisingly weak. The case for a global warming treaty, which depends on the accuracy of all those statements, is shockingly weak.”

Thus we see that at least as late as 1998, William Niskanen himself was quite skeptical of the case for an international climate change agreement, and wondered whether the very project of limiting emissions was “compatible with a modern economy.” That fact is awkward enough for the folks at today’s Niskanen Center, who now take it as obvious that emissions restrictions are a wise policy move. Yet what is truly awkward is that the author of the above-quoted 1998 Cato essay is…Jerry Taylor.

Another of Taylor’s conservative/libertarian heroes is Milton Friedman. On page 9 of his new study, Taylor writes, “For these reasons, free market economists have long embraced emission taxes in lieu of direct regulation,” and then cites Milton and Rose Friedman’s Free to Choose in the footnote. Although he doesn’t come right out and say, “Milton Friedman would agree with me if he were alive,” Taylor certainly leads his reader to believe that.

The problem with such a claim is that Friedman was talking about classic types of pollution in his book, and one of the very things under debate is whether emissions of carbon dioxide—which is colorless and odorless, which plants breathe, and which confers net external benefits to humanity through mid-century, according to at least one popular climate model—should be so casually compared to other activities that traditionally were considered pollution.

We don’t know for sure what Milton Friedman would say about it—which is why his son was upset when another group claimed his father’s name when pushing a carbon tax—but we do know that Milton Friedman gave this blurb in 1998 to Thomas Gale Moore’s Climate of Fear: Why We Shouldn’t Worry About Global Warming:

This encyclopedic and even-handed survey of the evidence of global warming is a welcome corrective to the raging hysteria about the alleged dangers of global warming. Moore demonstrates conclusively that global warming is more likely to benefit than to harm the general public.

(I note with irony that on the topic of global warming science and policy implications, Milton Friedman praising a Cato book in 1998 sounded a lot like Jerry Taylor in his Cato publication from 1998.)

Finally we turn to libertarian economist Murray Rothbard. In a section scolding conservatives for ignoring the findings of science, Taylor quotes a passage from Rothbard who wrote in his 1973 book For a New Liberty (when discussing traditional air pollution) that “denial of the very existence of the problem is to deny science itself and to give a vital hostage to the leftist charge that defenders of capitalism ‘place property rights above human rights.’” In the passage that Taylor quotes, Rothbard goes on to say that “a defense of air pollution does not even defend property rights; on the contrary it puts these conservatives’ stamp of approval on those industrialists who are trampling upon the property rights of the mass of citizenry.”

Although Taylor doesn’t explicitly say that Murray Rothbard would agree with him in the current policy dispute, that is the implicit rhetorical purpose that the Rothbard quote serves. At the very least, Taylor is implying that any conservative who disagrees with his analysis must be rejecting science and siding with the industrialists who are trampling on property rights—in this case, by emitting carbon dioxide at will.

In this context, it is again very awkward for Taylor that in literally the next sentence from where Taylor ended his quote from the 1973 book, Rothbard goes on to a different target of his ire:

A second, and more sophisticated, conservative response is by such free-market economists as Milton Friedman. The Friedmanites concede the existence of air pollution but propose to meet it, not by a defense of property rights, but rather by a supposedly utilitarian “cost-benefit” calculation by government, which will then make and enforce a “social decision” on how much pollution to allow. This decision would then be enforced by licensing a given amount of pollution (the granting of “pollution rights”), by a graded scale of taxes against it, or by the taxpayers paying firms not to pollute. Not only would these proposals grant an enormous amount of bureaucratic power to government in the name of safeguarding the “free market”; they would continue to override property rights in the name of a collective decision enforced by the State. This is far from any genuine “free market”… [Murray Rothbard, For a New Liberty, pp. 260-261, bold added.]

And so we see that in literally the sentence after Taylor stopped quoting from him, Murray Rothbard went on to excoriate the policy of the federal government taxing polluters (or enacting a cap-and-trade program) in the name of upholding “the free market.”

For those keeping score at home, in this section we showed that William Niskanen—the namesake of the Center that Taylor runs—was very dubious about international agreements to limit carbon dioxide emissions at least in 1998; that Milton Friedman did support taxes on traditional pollution but did not seem to think carbon emissions qualified as such in 1998; and that Murray Rothbard rejected the idea of federal bureaucrats taxing and regulating even traditional pollution (so we can only imagine what Rothbard would have thought of Taylor’s proposed federal carbon tax).

Beyond the awkward fact that these icons are hardly appropriate for the uses to which Taylor has put them, it should lead the neutral reader to wonder how accurately Taylor is presenting his other pieces of evidence for his case.

Conclusion

Jerry Taylor’s new manifesto on the conservative case for a carbon tax is actually refreshing: the careful reader should walk away from it, convinced that no conservative could possibly support such a plan. Most obvious, readers should be quite skeptical of Taylor’s claims, when he assures his readers that all serious carbon tax proposals are revenue-neutral, even though he just proposed one that wasn’t; and furthermore when he cites icons in his camp who probably would strongly object to his scheme.

More broadly, Taylor bases his case on knife-edge political calculations: On the one hand, conservative Republicans aren’t strong enough to get the sensible policies they want, but on the other, they’re strong enough to block a carbon tax. Furthermore, conservative Republicans are strong enough to force their opponents to honor a deal once struck. Rather than following Taylor down the rabbit hole of his wargame strategizing, conservatives should stick to supporting policies that actually make sense and uphold their values.

Taylor is right when he tells conservatives that the current regime of energy interventions is harmful and doesn’t even make sense on the EPA’s own grounds for action. That is all the more reason conservatives should not strike a deal with the people who helped create the present mess.


[1] We are referring to the fiscal aspects of the Morris plan—namely the tax swap—and not the (hard-to-quantify) potential economic benefits from rolling back existing regulations.

[2] Taylor himself wrote in 2008, “[W]hile no one I know doubts that externalities are real in the modern world, many of us doubt our ability to quantify them with any certainty or to remedy them through the political process in an efficiency-enhancing manner. One recent survey of the literature, for example, found that estimates regarding the externalities imposed by a ton of carbon emissions range from $9-200. If politicians were ever inclined to internalize those externalities through some set of public policies, the figure they would settle on would undoubtedly be driven more by politics than hard science or economics…” [bold added].

[3] As spelled out in Table 11-1 of Morris’ proposal, over 20 years the $815 billion in (undiscounted) deficit reduction comes from $120 billion in reductions in “clean energy” spending, while the remaining $695 billion comes from an explicit increase in taxes above the recycling of carbon tax receipts in the form of rebates to poor households and corporate tax cuts. However, the $405 billion reserved as a “set-aside for low-income individuals” is arguably at least a partial increase in government spending, rather than representing a move in the direction of revenue-neutrality; the government is sending checks to households to compensate them for higher energy prices, not merely giving them a partial rebate on carbon taxes that they themselves paid.

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