NCPA - National Center for Policy Analysis

CLIMATE CHANGE: SHOULD WE TAX THE POOR TO HELP THE RICH?

February 18, 2009

Acting now might slow global warming so that major adjustments are not needed later.  But there are two huge disadvantages:

  • Actions today will be based on current technology, but because technology will almost certainly improve, solutions implemented in the future are likely to be more efficient.
  • Money spent now to offset global warming could be invested in ways that would increase national income and wealth, creating more options to deal with any future negative effects of a warmer world.

Economists use discount rates to compare costs and benefits that occur at various points in time.  A discount rate converts a future cost or benefit into a present cost or benefit.  Economist Kevin Murphy of the University of Chicago advocates using the interest rate as the discount rate.  Imagine that the damage from continued use of CO2-emitting fuels is $300 per ton of emissions 100 years from now.  In 100 years, a $300 per ton tax on carbon emissions would reflect social cost:

  • Thus beginning at a 6 percent interest rate, a tax of 8 cents per ton would pay the social costs of one ton of emissions in a century.
  • If the tax were implemented 80 years from now, the rate would be $93.54 per ton.
  • To put these numbers in perspective, a $1.00 tax per ton of carbon translates into a one-third per gallon tax on gasoline.

Today, the actual federal tax is 18.4 cents per gallon.  Thus, if the correct carbon tax 100 years from now is $300, this implies that the gasoline tax today is much higher than the rate required to recoup the social costs of global warming.

If the government limits carbon emissions now through taxes or direct caps it is taxing the poor today to benefit wealthier future generations. 

Source:  David Henderson, "Climate Change Policy: Should We Tax the Poor to Help the Rich?" National Center for Policy Analysis, Brief Analysis No. 644, February 18, 2009.

For study:

http://www.ncpa.org/pub/ba644

 

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