As the idea of taxing our carbon dioxide (CO2) emissions has gained traction in surprising quarters over the past several years, speculation about the costs and benefits of implementing a carbon tax has become a parlor game among economists and political pundits. The most recent analysis comes from the Tax Foundation, which considers using a carbon tax to offset the lost revenue to the federal budget due to President Trump’s tax cut bill, the 2017 Tax Cuts and Jobs Act (TCJA), instead of cutting spending.
But what exactly is a carbon tax and what would it accomplish? In short, it is akin to other sin taxes, which attempt to decrease our use of “sinful” products by increasing the price of them. In this case, the goal is to decrease CO2 emissions by increasing the price of fossil fuels and decreasing our consumption of them. Carbon taxes also have the side benefit of raising government revenues, as opposed to a mandated emissions cap that simply imposes an added cost.
However, carbon dioxide emissions aren’t sinful — in fact, the benefits of fossil fuels to humanity, both in the United States and around the world, far outweigh any future consequences of mild warming.
While a person can cease consuming cigarettes and alcohol and still maintain a fulfilling and robust life, the same cannot be said of the energy we derive from fossil fuels. It is indisputable that our increasing use of fossil fuels has led to increases in life expectancy, income, and numerous other quality of life measures. Plus, the wealth and technology provided by fossil fuels has allowed us to become better and better at reducing air pollution.
With the exception of nuclear energy, which is unfortunately still considered an anathema in most developed countries, as well as hydropower and geothermal, which are geographically limited, there is not a viable carbon-free substitute for fossil fuels. Despite more than $100 billion in federal subsidies over the past decade for wind, solar, and biofuels and numerous state and local efforts, the total consumption of fossil fuels in the U.S. has not declined since 2010. Public policy cannot change physics and economics, and none of those energy resources can rival the energy density, ease of storage, and flexibility that fossil fuels have.
According to modelling performed by the Heritage Foundation, a carbon tax of $35/ton would cut emissions by 44% by forcing the early retirement of coal and older gas-fired power plants. However, a carbon tax of $300 per ton, equivalent to a tax of more than $2 per gallon of gasoline — essentially doubling the price of gas — would only cut U.S. CO2 emissions by 58%. Fossil fuels are still needed to back up wind and solar generation, electric vehicles are not yet cheap enough for consumers to easily switch, and substitutes do not even exist for fossil fuels in many industrial processes.
British Columbia, which has garnered much praise from economists for its carbon tax, offers an excellent case study. In 2008, they implemented a $10/ton tax on carbon emissions and have gradually increased it to the current level of $40/ton. The Canadian province relies almost entirely on hydropower for electricity and is not a hub for heavy industry, so the efficacy of the tax relies almost entirely on reducing vehicle emissions. Since the tax was implemented, per capita greenhouse gas emissions have declined by 13%, but total GHG emissions are flat as the province has grown. $40/ton appears to be enough to induce some behavior change but is clearly not enough for people to switch in significant numbers toward public transportation or electric vehicles.
The point is that while there may be room to reduce CO2 emissions and use more wind and solar energy around the margins, any effort to significantly decarbonize would raise energy prices to a level that would devastate our economy. With a third of Americans reporting difficulty in paying their energy bills and more than 2/3 of Americans saying they would not pay $10 or more per month in extra electricity costs to combat climate change, even a smaller carbon tax will impose financial pain that many Americans are unable to bear.
The Tax Foundation’s proposal projects that a carbon tax of $60/ton would generate $177 billion in 2021, enough to offset the revenue loss from a permanent extension of the TCJA tax cuts. They claim this option would increase the long-run size of the economy by 1% compared to the business-as-usual scenario of letting the tax cuts expire. That projection may be accurate, but taxpayers in the lowest income bracket would be burdened disproportionately. The report notes that if tax credits were used to offset this unfair distributive effect, the proposal would no longer be revenue-neutral — meaning it would require increasing the deficit or raising other taxes.
The irony of this entire discussion is that a carbon tax that was only applied to the U.S. would not have any measurable effect on climate change. Eliminating all U.S. carbon emissions by 2030 would slow the rise in global temperatures by only 0.14°C by 2100. And good luck trying to impose a carbon tax on the developing world where 860 million people lack access to electricity and a couple billion more have only limited access. Those countries face far more immediate and dire human and environmental problems than climate change.
A carbon tax is an attempt to rid us all of the perceived sin of carbon emissions, but what is the sin of using our energy resources to increase our prosperity and make us more resilient? Absent the ability to affordably replace the fossil fuels that power our economy, carbon taxes simply become a social engineering and wealth redistribution scheme that Americans will not stand for.