Would a Carbon Dioxide Tax Be Efficient?

September 5, 2012

Carbon taxes are back in the news, supported by a number of prominent conservative economists. The central principle underlying this support for a major tax increase is one that many economic conservatives endorse: Taxes are a relatively efficient policy tool for dealing with environmental externalities. And it is alleged by many that carbon dioxide emissions are responsible for harmful anthropogenic global warming and are thus worthy of taxation, says Benjamin Zycher, a visiting scholar at the American Enterprise Institute.

Leaving aside the continuing questions of the underlying climate science, if we assume that carbon dioxide drives harmful climate change, is it reasonable to predict that the adoption of a carbon tax would yield economic improvement relative to current policies?

Consider the direct policy goal of the environmental Left:  An 80 percent reduction below 1990 levels of carbon dioxide emissions by 2050.

  • If such a reduction were to be achieved by the United States alone through any mix of policy tools, the effect on global temperatures 100 years hence would be effectively zero, an outcome about which there is no dispute.
  • Moreover, increasing emissions from other nations, particularly still-developing countries such as China and India, will yield growing concentrations of greenhouse gases.
  • Unilateral U.S. policies would be futile regardless of the assumption made about the underlying climate science.

Thus, a carbon tax, in order to have an actual effect on the purported carbon dioxide externality, must be imposed by all of the Organization for Economic Cooperation and Development countries at a minimum. In order to avoid adverse competitive effects on international trade flows, any such tax would have to be negotiated, which would represent a textbook creation of an international tax cartel.

Adoption of a common carbon tax would yield winners and losers, and given the powerful incentives of governments to "harmonize" (collude on) their tax and regulatory policies more generally, negotiation of a uniform carbon tax inexorably would lead to collusion on other taxes as well, at least as a means of compensating the losers. Such "harmonization" is likely to result in the creation of an international body charged with the collection and redistribution of carbon tax revenues, a classic "revenue-sharing" cartel in which nations acting collectively are able to impose taxes higher than those that would be observed if the individual countries had to compete for investment capital and the like. The implications of an internationalization of tax and regulatory policies for economic growth are not salutary to say the least.

There are two alternative justifications: A carbon tax as a tool with which to reduce the net costs of current environmental policy and/or as a revenue-neutral tax instrument with which to improve the efficiency of the tax system. Zycher dismisses the first justification because the tax would be additive, not a substitute in place of the current regulatory approach.  Nor is a carbon tax in isolation likely to be "efficient" as a revenue instrument, even if imposed as part of a "revenue-neutral" tax reform, he says.

Source: Benjamin Zycher, "Would a Carbon Dioxide Tax Be 'Efficient'?" The American, August 30, 2012.


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