What Would A U.S. Carbon Tax Accomplish?

by Oren Cass

Over at the Niskanen Center, David Bailey and David Bookbinder (hereinafter B&B) have offered a thoughtful response to “The Carbon-Tax Shell Game,” my article in National Affairs criticizing carbon tax proposals for relying on a shifting series of rationales that hold up poorly to scrutiny. In my view, the carbon tax makes sense neither as environmental policy nor fiscal policy, and its shortcomings on one dimension cannot be defended by appealing to its benefits on the other.

Interested readers can decide for themselves who has the better of the argument. Here I highlight a portion of B&B’s argument that struck me as novel, but which I think underscores one of the main challenges for the pro-tax case: What is the transmission mechanism from U.S. tax to global action?

B&B “take as a given that adding or subtracting the U.S. emissions avoided through a carbon tax will have no discernible impact on global temperatures,” which means that their affirmative case for the tax as a response to climate change hinges on its ability to influence international behavior. Specifically, and I think they would agree with this, it must either help to produce a global agreement or spur innovative new technologies so cheap that other countries will voluntarily adopt them. But how does a carbon tax achieve either?

Global Agreement. In what I found most remarkable about their piece, B&B lead with the argument that the U.S. can produce an international agreement by offering the developing world things that are “immediate, tangible, and have inherent monetary worth.” First and foremost, they mention the Green Climate Fund (GCF).

For the uninitiated, the GCF is the commitment made by developed nations to give the developing world at least $100 billion annually by 2020, and many expect the upcoming negotiations in Paris to produce increasing commitments thereafter. But if the actual mechanism for compelling global action is a commitment to hundreds of billions in wealth transfers for decades to come, we should debate that directly. Only if that approach is a good one (it is not), and a U.S. carbon tax helps achieve it, does a U.S. carbon tax make sense.

B&B mention other possible inducements as well, but with the developing world already treating the GCF as an inadequate opening bid, is it difficult to envision a final package along these lines looking smaller than the GCF does today. Regardless, the rationale for the carbon tax has shifted subtly and U.S. “leadership” is no longer the key spur to action, now it’s U.S. wealth. If the case for a carbon tax is actually the case for carbon-tax-plus-GCF, that is a rather different proposal and one likely to attract far less support than the carbon tax we started with.

(B&B also suggest that a carbon tax would include a tariff on any country that does not implement its own carbon price, motivating others to take action. This claim requires a longer discussion of its own, but three central concerns here are: the possibility of retaliatory tariffs or even a broader disruption of the trading system; the difficulty of determining what policies in other countries, e.g., other subsidies, taxes, and regulations, should or should not count as carbon prices of what level; and the fairly small stick such a tariff represents relative to the large demand that the country adopt an economy-wide carbon tax.)

Innovation. B&B’s approach on innovation also stands out. For one thing, they concede that a U.S. carbon tax “would not change investment decisions much,” which I think undermines their case significantly. For another, they point to Europe’s more efficient cars and higher adoption of renewable power as evidence that higher prices there are “driv[ing] innovation.” But this conflates changing consumption with actual innovation.

If what the world needs is small cars and expensive wind turbines, it can already buy those. If a U.S. carbon tax compels the U.S. consumer to pay for them, it will have an effect on U.S. emissions. But without low-carbon/low-cost breakthroughs that other economies would voluntarily adopt, there is no transmission mechanism to alter behavior around the globe.

If a U.S. carbon tax depends on global impacts, and the only global impact comes not from the tax but from a different policy (wealth transfers) that has not been defended, the benefits are hard to see.

— Oren Cass is a Senior Fellow at the Manhattan Institute.

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