Is There a Case for the Carbon Tax for Those Who Believe in Limited Government?

The libertarian blogosphere had a field day a few weeks ago when libertarian Jerry Taylor, who is heading up the newly-founded Niskanen Center, made a conservative argument for a carbon tax (see the full report here). Taylor essentially argues that because climate change is an issue, we need to reduce carbon emissions so that we can avert the cataclysmic events that can happen. His solution? A revenue-neutral carbon tax to replace command-and-control regulation of carbon emissions. Given the current reality, is Taylor's solution the least worst option that conservatives and libertarians could ask for? Let's take a look at Taylor's argument piece by piece:

I. Carbon Tax or Command-and Control? 

Taylor spends this section of the report arguing that given the public opinion in favor of limiting greenhouse gas (GHG) emissions and political support for such action, the options on the table are not "carbon tax or no government intervention" (Taylor, p. 5-7). As such, Taylor does not view it as whether the government should regulate GHG emissions, but rather how the government should regulate them (p. 8). I can't help but find it amusing how Taylor chides conservatives for providing a false dichotomy of "carbon tax or nothing" (p. 3) while providing a false dichotomy himself.

Taylor's proposal only occurs if those on the Left agree to scale back or dismantle the EPA's command-and-control regulation. Taylor essentially blames the Republicans for being stubborn mules, but it wouldn't matter because it would be exceptionally difficult to dismantle even if the Republicans didn't "treat it as the third rail." Why? As Taylor admits, the EPA is well-entrenched in GHG regulation and "has more than enough resources and manpower to write regulations directly" (p. 7). And who is to say that both command-and-control regulation and the carbon tax don't end up being implemented? The fact that both could become policy should make any conservative or libertarian shudder at the thought.

Taylor also argues that the proposed carbon tax should be revenue-neutral. While this idea is palatable and sounds nice in theory, the reality is that it would be hard to implement in practice. This country has an increasing amount of debt, and in order to pay that off, the temptation is to raise taxes, not maintain them at current levels. What's funny is that less than two months after publishing his report, Taylor changes his argument about the carbon tax being revenue-neutral. He essentially is saying that because tax hikes are going to be part of reducing debt, conservatives might as well accept that fact. Passively accepting higher rates of taxation is not conservative, and it's disappointing to see Taylor throw out that vital part of his argument.

II. The Case for Risk Management

After reading this section, I think this is where Taylor actually makes the strongest case. I have my skepticism about anthropogenic global warming. After all, there are so many unknowns: the levels of carbon released in the upcoming years, climate sensitivity, how that will affect the climate system, technological progress, and economic growth. Conversely, risk aversion is part of risk management. We don't know the parameters, but the presence of risk is there because we know that higher concentrations of GHGs influence climate. What does one do in a non-diversifiable, low-probability, high-risk scenario in the private sector? Hedge against the risk. If investors didn't have any risk aversion, they would never invest in bonds. They would always put their money in high-risk equities. However, that's not the way of finance or risk management. We should be willing to apply the same concepts here.

Conceptually speaking, I am on board with managing risk. In this context, however, it is the implementation that becomes tricky. This was something I had discussed last year with regards to the social cost of carbon, specifically with being able to choose a discount rate for the cost. A higher discount rate allows for higher tolerance of risk, whereas a lower discount rate would make us more risk-adverse since the cost of carbon would increase. Willingness to pay and risk preferences are subjective (p. 15). If the current administration views the threat in an alarmist fashion, then we pay more than we should have. If another administration underestimates the gravitas of the situation, then we'll pay for it in the long-run. Regardless of the discount rate that is chosen, whoever is in charge should look at the situation with all standard discount rates in mind before making a decision.

III. The Anatomy of a Carbon Tax

Taylor argues that command-and-control regulation is the most costly way of achieving emission reduction since they "allow relatively little flexibility in the means of achieving goals" and "force firms to take on similar shares of the pollution-control burden, regardless of the cost (p. 8)." Offsetting the carbon tax with reductions in other places in the wonderful world of taxation because things like the corporate tax or the estate tax are that ridiculous. A revenue-neutral carbon tax can provide tax cuts, whereas a command-and-control regulatory system and its implicit taxes [via regulation] cannot (p. 16). That much I will agree: a carbon tax is preferable to command-and-control. However, as I will point out in the Conclusion, this assumes that these are the only two policy options on the table, and that is not the case.

IV. Conservative Objections to Carbon Taxes

In this section, Taylor addresses five conservative objections to carbon taxes. I highlight two of them I found worth addressing.

Unilateral Action is Pointless: The common argument is that without global action, the United States acting unilaterally is pointless. To address emissions leakage (i.e., if they don't emit GHGs here, they'll do it elsewhere), Taylor calls for add charges on imports that benefit from GHG emission, or rebating those impacted by the leakage (p. 19-20). Last time I checked, that was protectionism, plain and simple, so more points are lost on making a "conservative argument" here, and none of that goes to enforceability or feasibility of Taylor's suggestion. Since he cannot refute the fact that unilateral action will bring down global emissions to an "acceptable level," Taylor implicitly concedes the point that a unilateral carbon tax won't help (which is what the Congressional Budget Office [CBO] has to say) because his focus is on non-climate benefits of the tax. Interesting how we go from arguing that this will be helpful for climate change to now using non-climate benefits as the underpinning for unilateral action.

Growing Government: Taylor first brings up that the tax would be revenue-neutral, although we already have seen Taylor retract that condition. He then argues that a carbon tax would decrease relative to the status quo of command-and-control, but again, this assumes that the government doesn't enact both command-and-control and a carbon tax. He concludes this sub-section with the idea if government exists to protect private property from harm (i.e., negative externalities), then it doesn't matter if the government "grows" (p. 21). If he cared about the least costly and most efficient approach, he would take the Bjørn Lomborg route and find the policy that would create the largest social benefit instead of sticking with the carbon tax, which doesn't have the same, desirable cost-benefit ratio.

My Concluding Thoughts

For conservatives and libertarians, there is the tension between pollutants being an assault/negative externality on humanity and the fact that most (if not all) disputes can best be and should be handled by the private sector, which is accompanied by a desire for limited government. Although it is difficult to pin down just how much damage the increasing temperatures will do in the future, there is enough of a preponderance of evidence that suggests that something should be done. For someone who is for less government, there should be the least intrusive and most economically efficient form of government intrusion.

After looking at the alternatives (especially cap-and-trade and carbon tax), I am one who believes that research and development subsidies are the way to go, as is illustrated by this study from American Enterprise Institute, the Brookings Institution, and the Breakthrough Institute. However, those subsidies still need a funding source. This is where I could see myself supporting a carbon tax.

As Hudson Institute Scholar Irwin Stelzer points out, even a climate skeptic can get behind a carbon tax because it would provide an opportunity to use the carbon tax to replace it with a more inefficient tax. This leads into my first criterion for carbon tax implementation: it has to replace a more inefficient tax. Second, this needs to be as revenue-neutral as humanly possible. Adding on more revenue while continuing more inefficient taxes is not productive. Third, this tax needs to be modest. I listed off seven concerns a couple of years ago, the most pressing one was deadweight loss (although not knowing the optimal tax level is also high on my list). Since the carbon tax will heavily affect energy prices, we need to find a way to make sure the regressive nature of the tax doesn't harm too many Americans in the process. Fourth, command-and-control would have to go away. I am most skeptical about this criterion since it is difficult to remove a bureaucracy once it is entrenched in something like carbon reduction. Finally, the funding needs to go to geo-engineering so that we can fund research and development of green technology. I have enough reasons to have doubts about implementing the carbon tax, but if these conditions could be met, it would be the least worst of viable options on the table.


7-3-2015 Addendum: The Committee for a Responsible Federal Budget just came out with a discussion on a carbon tax proposal.