The Case Against a Carbon Tax

By Robert P. Murphy

Patrick J. Michaels

Paul C. Knappenberger

September 4, 2015

CATO WORKING PAPER No. 33

1000 Massachusetts Avenue NW

Washington DC 20001

Cato Working Papers are intended to circulate research in progress for comment and discussion.

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TheCaseAgainstaU.S.CarbonTax*

CATOWORKINGPAPER#33

RobertP.Murphy

PatrickJ.Michaels

PaulC.Knappenberger

EXECUTIVESUMMARY

A vigorous campaign aimedatAmericanpolicymakers and the general public has

triedtocreatetheperceptionthata federalcarbontax(orsimilartypeof“carbon

price”) is a crucial element in the urgently needed response to climate change.

Within conservative and libertarian circles, a small but vocal group of academics,

analysts,andpoliticalofficialsareclaimingthatarevenue‐neutralcarbontaxswap

could even deliver a “double dividend”—meaning that the conventional economy

would be spurred in addition to any climate benefits. The present study details

several serious problems with these claims.. The actual economics of climate

change—as summarized in the peer‐reviewed literature as well as the U.N. and

ObamaAdministrationreports—revealthatthecaseforaU.S.carbontaxisweaker

thanthepublichasbeentold.

Inthepolicydebateovercarbontaxes,akeyconceptisthe“socialcostofcarbon,”

which is defined as the (present value of) future damages caused by emitting an

additional ton of carbon dioxide. Estimates of the SCC are already being used to

evaluatefederalregulations,andwillserveasthebasisforanyU.S.carbontax.Yet

thecomputersimulationsusedtogenerateSCCestimatesarelargelyarbitrary,with

plausible adjustments in parameters—such as the discount rate—causing the

estimate toshiftbyat leastanorderofmagnitude. Indeed,MITeconomistRobert

Pindyckconsidersthewholeprocesssofraughtwithunwarrantedprecisionthathe

hascalledsuchcomputersimulations“closetouseless”forguidingpolicy.

*TheauthorsgratefullyacknowledgeDavidR.HendersonandJeffreyMironforcommentsonanearlydraft,andJimManziforprovidingreferences.

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Futureeconomicdamagesfromcarbondioxideemissionscanonlybeestimatedin

conjunction with forecasts of climate change. But recent history shows those

forecasts are in flux, with an increasing number of forecasts of less warming

appearing in the scientific literature in the last four years. Additionally,we show

some rather stark evidence that the family of models used by the U.N.’s

Intergovernmental Panel on Climate Change (IPCC) are experiencing a profound

failurethatgreatlyreducestheirforecastutility.

Ironically,thelatestU.N.IntergovernmentalPanelonClimateChange(IPCC)report

indicated that a popular climate target cannot be justified in cost/benefit terms.

Specifically, in themiddle‐of‐the‐roadscenarios, theeconomiccompliancecostsof

limitingglobalwarmingto2degreesCelsiuswouldlikelybehigherthantheclimate

changedamagesthatsuchacapwouldavoid.Inotherwords,theU.N.’sownreport

shows that aggressive emission cutbacks—even if achieved through an “efficient”

carbontax—wouldprobablycausemoreharmthangood.

Ifthecaseforemissioncutbacksisweakerthanthepublichasbeenledtobelieve,

the claim of a “double dividend” is on even shakier ground. There really is a

“consensus” in this literature, and it is that carbon taxes cause more economic

damage than generic taxes on laboror capital, so that in general even a revenue‐

neutralcarbontaxswapwillprobablyreduceconventionalGDPgrowth.(Thedriver

of this result is that carbon taxes fall onnarrower segments of the economy, and

thustoraiseagivenamountofrevenuerequireahighertaxrate.)Furthermore,in

the real world at least someof the new carbon tax receipts would probably be

devoted to higher spending (on “green investments”) and lump‐sum transfers to

poorercitizenstohelpoffsettheimpactofhigherenergyprices.Thusinpracticethe

economicdragofanewcarbontaxcouldbefarworsethantheidealizedrevenue‐

neutralsimulationsdepict.

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Whenmoving from academic theory to historical experience, we see that carbon

taxeshavenotliveduptothepromisesoftheirsupporters.InAustralia,thecarbon

taxwasquicklyremovedafterthepublicrecoiledagainstelectricitypricehikesand

afalteringeconomy.EveninBritishColumbia—toutedastheworld’sfinestexample

of a carbon tax—the experience has been underwhelming. After an initial (but

temporary) drop, the B.C. carbon tax has not yielded significant reductions in

gasoline purchases, and it has arguably reduced the B.C. economy’s performance

relativetotherestofCanada.

Bothintheoryandpractice,economicanalysisshowsthatthecaseforaU.S.carbon

tax isweaker than itsmostvocal supportershave led thepublic tobelieve.At the

sametime, there ismountingevidence inthephysicalscienceofclimatechangeto

suggestthathumanemissionsofcarbondioxidedonotcauseasmuchwarmingasis

assumedinthecurrentsuiteofofficialmodels.Policymakersandthegeneralpublic

mustnotconfusetheconfidenceofcarbontaxproponentswiththeactualstrength

oftheircase.

INTRODUCTION

Over the years, Americans have been subject to a growing drumbeat of the

(ostensibly)urgentneedforaggressivegovernmentactiononclimatechange.After

twofailedattemptsataU.S. federalcap‐and‐tradeprogram,thosewishingtocurb

emissionshaveswitchedtheirfocustoacarbontax.

Although environmental regulation and taxes are traditionally associated with

progressives Democrats, in recent years several vocal intellectuals and political

officials from the right have begun pitching a carbon tax to libertarians and

conservatives. They argue that climate science respects no ideology and that a

carbon tax is a “market solution” far preferable to the top‐down regulations that

liberalDemocratswillotherwiseimplement.Inparticular,advocatesofacarbontax

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claim that if it is revenueneutral then a “tax swap” deal involving reductions in

corporate andpersonal income tax ratesmightdeliver strongereconomic growth

andreducetheharmsfromclimatechange,whatevertheymightbe.

Although they often claim to be merely repeating the findings of “consensus

science,” advocates of aggressive government intervention stand on very shaky

ground.Usingstandardresults fromtheeconomicsofclimatechange—ascodified

in the peer‐reviewed literature and published reports from the U.N. and Obama

Administration—we can show that the case for a carbon tax is weaker than the

publichasbeen led tobelieve.Furthermore, the real‐worldexperiencesof carbon

taxes in Australia and British Columbia cast serious doubt on the promises of a

“market‐friendly”carbontaxintheUnitedStates.

The present study will summarize some of the key issues in the climate policy

debate, showing that a U.S. carbon tax is a dubious proposal in both theory and

practice.

THE“SOCIALCOSTOFCARBON”

The “social cost of carbon” (often abbreviated SCC) is a key concept in the

economicsofclimatechangeandrelatedpolicydiscussionsofacarbontax.TheSCC

isdefinedasthepresent‐discountedvalueofthenetfutureexternaldamagesfrom

anadditionalunitofcarbondioxideemissions.Intermsofeconomictheory,theSCC

measures the “negative externalities” from emitting CO2 (and other greenhouse

gasesexpressedinCO2‐equivalents),andhelpsquantifythe“marketfailure”where

consumersand firmsdonot fully take intoaccount the truecostsof theircarbon‐

intensiveactivities.Toafirstapproximation,the“optimal”carbontaxwouldreflect

the SCC (along the emission trajectory that would obtain with the carbon tax

regime),andinpracticetheObamaAdministrationhasissuedestimates1oftheSCC

that are being used in the cost/benefit evaluation of federal regulations (such as

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minimumenergyefficiencystandards)thataimtoreduceemissionsrelativetothe

baseline.

ItisimportanttonotethattheSCCreflectstheestimateddamagesofclimatechange

ontheentireworld.ThismeansthatiftheSCC(calculatedinthisfashion)isusedin

federalcost/benefitanalyses,theanalystiscontrastingbenefitsaccruingmostlyto

non‐Americanswith costsbornemostlybyAmericans.Whether the reader thinks

this isvalidornot, it isclearlyanimportantissuethathasnotbeenmadeclearin

theU.S.debateonclimatechangepolicy.Inanyevent,theOfficeofManagementand

Budget (OMB), in its Circular A‐4, clearly states that federal regulatory analyses

shouldfocusondomesticimpacts:

Youranalysisshouldfocusonbenefitsandcoststhataccruetocitizensandresidents of the United States.Where you choose to evaluate a regulationthat is likely tohaveeffectsbeyond thebordersof theUnitedStates, theseeffectsshouldbereportedseparately.2

However,whentheObamaAdministration’sInteragencyWorkingGroupcalculated

theSCC,itignoredthisclearOMBguideline,andonlyreportedaglobalvalueofthe

SCC. Thus, if a regulation (or carbon tax) is thought to reduce carbon dioxide

emissions, then theestimatedbenefits (calculatedwithuseof theSCC)will vastly

overstatethebenefitstoAmericans.

As an affluentnation, theU.S. economy ismuch less vulnerable to the vagariesof

weather and climate.Using twodifferent approaches, theWorkingGroup in2010

“determinedthatarangeofvaluesfrom7to23percentshouldbeusedtoadjustthe

globalSCC tocalculatedomesticeffects.Reporteddomesticvaluesshoulduse this

range”(p.11).Therefore,followingOMB’sclearguidelineonreportingthedomestic

impactsofproposedregulations,theSCCvaluewouldneedtobereducedanywhere

from77 to 93 percent, in order to show the benefit toAmericansfrom stipulated

reductionsincarbondioxideemissions.Torepeat,thesefiguresallderivefromthe

ObamaAdministration’sownWorkingGroupreport.

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Inaddition to suchproceduralproblemswith theuseof theSCC in federalpolicy,

therearedeeper,conceptualproblems.Theaveragelaypersonmayhavethebelief

thatthe“socialcostofcarbon”isanempiricalfactofnaturethatscientistsinwhite

labcoatsmeasurewiththeirequipment.However,inrealitytheSCCisamalleable

concept that is entirely driven by the analyst’s (largely arbitrary) initial

assumptions.TheestimatedSCCcanbequitelarge,modest,orevennegative—this

latter meaning that greenhouse gas emissions should arguably be subsidized to

benefit humanity—depending on defensible adjustments of the inputs to the

analysis.

ThemostpopularcurrentapproachusedbyU.S.policymakerstoestimatetheSCC

involves the use of computer‐based Integrated AssessmentModels (IAMs),which

are complex simulations of the entire global economy and climate system for

hundredsofyears.Officially,theIAMsaresupposedtorelyonthelatestresults in

thephysicalscienceofclimatechange,aswellaseconomicanalysesoftheimpactsof

climatechangeonhumanwelfare,wheretheseimpactsaremeasuredinmonetary

unitsbutincludeawiderangeofnon‐marketcategories(suchasfloodingandloss

ofecosystemservices).Withparticularassumptionsaboutthepathofemissions,the

physical sensitivity of the climate system to atmospheric CO2 concentrations, and

theimpactonhumansfromchangingclimateconditions,theIAMsestimatetheflow

of incremental damages occurring centuries into the future as a result of an

additionalunitofCO2emissionsinsomeparticularyear.Thenthisflowofadditional

dollardamages(overthecenturies)canbeturnedintoanequivalentpresentvalue

expressedinthedollarsatthedateoftheemission,usingadiscountratechosenby

the analyst, where this rate is typically notderived from observations of market

rates of interest but is instead picked (quite openly) according to the analyst’s

ethicalviewsonhowfuturegenerationsshouldbetreated.

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InMay 2013, the InteragencyWorking Group produced an updated SCC value by

incorporating revisions to the underlying three Integrated Assessment Models

(IAMs)usedbytheIWGinitsinitial2010SCCdetermination.But,atthattime,the

IWGdidnotupdatetheequilibriumclimatesensitivity(ECS)employedintheIAMs.

The ECS is a critical concept in the physical science of climate change. Loosely

speaking, it refers to the long‐run (after taking into account certain feedbacks)

warming in response to a doubling of carbon dioxide concentrations. Thus, it is

incredibly significant that the published estimates of the ECS were trending

downward, and yet theObamaAdministrationWorkingGroupdidnot adjust this

keyinputintotheIntegratedAssessmentcomputermodels.Specifically,theymade

nodownwardadjustment in thiskeyparameter in theirMay2013updatedespite

there having been, since January 1, 2011, at least 15 new studies and 21

experiments (involving more than 45 researchers)3examining the ECS, each

loweringthebestestimateandtighteningtheerrordistributionaboutthatestimate.

Thedramaticallyloweredsensitivityintherecentliteratureisgraphicallyshownin

ourFigure1.TherangeusedbytheIWGisclearlyoutdated;itwascalculatedbyRoe

andBakerin2007.4

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Figure 1. The median (indicated by the small vertical line) and 90% confidence range (indicated by the horizontal line with arrowheads) of the climate sensitivity estimate used by the Interagency Working Group on the Social Cost of Carbon Climate (Roe and Baker, 2007) is indicated by the top black arrowed line. The average of the similar values from 21 different determinations reported in the recent scientific literature is given by the grey arrowed line (second line from the top). The sensitivity estimates from the 21 individual determinations of the ECS as reported in new research published after January 1, 2011 are indicated by the colored arrowed lines. The arrows indicate the 5 to 95% confidence bounds for each estimate along with the best estimate (median of each probability density function; or the mean of multiple estimates; colored vertical line). Ring et al. (2012)5 present four estimates of the climate sensitivity and the

9

red box encompasses those estimates. Spencer and Braswell (2013)6 produce a single ECS value best-matched to ocean heat content observations and internal radiative forcing. The abundance of literature supporting a lower climate sensitivity was at least

partially reflected in the latest (2013) assessmentof the IntergovernmentalPanel

onClimateChange(IPCC):

Equilibrium climate sensitivity is likely in the range 1.5°C to 4.5°C(highconfidence), extremelyunlikely less than 1°C (highconfidence),and veryunlikely greater than 6°C (medium confidence). The lowertemperaturelimitoftheassessedlikelyrangeisthuslessthanthe2°CintheAR4[FourthAssessmentReport]…

Clearly,theIWG’sassessmentofthelowendoftheprobabilitydensityfunctionthat

bestdescribesthecurrentlevelofscientificunderstandingoftheclimatesensitivity

isindefensible.

The 2013 study of Otto et al.,whichwas available at the time of the IWG’s 2013

revision, isparticularlynoteworthyinthat15ofthepaper’s17authorswerealso

leadauthorsofthe2013IPCCreport.Ottohasameansensitivityof2.0°Canda5‐

95%confidenceintervalof1.1to3.9°C.IftheIPCCtrulydefinedtheconsensus,that

consensus has now changed. Instead of a 95th percentile value of 7.14°C, as used by the

IWG, a survey of the recent scientific literature suggests a value of 3.5°C—more than

50% lower. This is very significant and important difference because the high end of the

ECS distribution has a large impact on the SCC determination—a fact frequently

commented on by the IWG.

Yet to repeat, the problemwith the SCC as a tool in policy analysis goes beyond

quibbles over the proper parameter values. At least the equilibrium climate

sensitivity(ECS)isanobjectivelydefined(inprinciple)featureofnature.Incontrast,

thereareotherparametersneededtocalculate theSCCthatbytheirveryessence

are subjective, suchas the analyst’s viewon theproperweight tobegiven to the

welfareoffuturegenerations.Needlesstosay,thisapproachto“measuring”theSCC

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is hardly the way physicists estimate themass of themoon or the charge on an

electron.ToquoteMITeconomistRobertPindyck(whofavorsaU.S.carbontax)in

hisscathingJournalofEconomicLiteraturearticle:

And here we see a major problem with IAM‐based climate policy analysis: The

modelerhasagreatdealoffreedominchoosingfunctionalforms,parametervalues,

andotherinputs,anddifferentchoicescangivewildlydifferentestimatesoftheSCC

andtheoptimalamountofabatement.Youmightthinkthatsomeinputchoicesare

morereasonableordefensiblethanothers,butno,“reasonable”isverymuchinthe

eyeofthemodeler.Thusthesemodelscanbeusedtoobtainalmostanyresult

onedesires.[Pindyck2013,boldadded.]7

Tosee justhowsignificantsomeof theapparently innocuousassumptionscanbe,

consider the latest estimates of the SCC put out by the Obama Administration’s

WorkingGroup. For an additional tonof emissions in the year2015, using a3%

discountratetheSCCis$36.However,ifweusea2.5%discountrate,theSCCrises

to$56/ton,whilea5%discount rateyieldsaSCCofonly$11/ton.8Note that this

huge swing in theestimated “social cost”of carbon relieson the sameunderlying

modelsofclimatechangeandeconomicgrowth;theonlychangeisinadjustmentsof

thediscount ratewhich arequiteplausible. Indeed, theAdministration’sWorking

Group came under harsh criticism because it ignored explicit OMB guidance to

include a 7percentdiscount rate in all federal cost/benefit analyses, presumably

becausetheSCCatsuchadiscountratewouldbecloseto$0/tonorevennegative.9

The reason the Obama Administration estimates of the SCC are so heavily

dependent on the discount rate is that the three underlying computermodels all

showrelativelymodestdamagesfromclimatechangeintheearlydecades.Indeed,

one model (Richard Tol’s FUND model) actually exhibits netbenefits from global

warmingthroughabout3°Cofwarmingrelativetopreindustrialtemperatures.The

higher thediscountrate, themoreweight isplacedonearlier timeperiods (when

globalwarmingisnotasdestructiveorisevenbeneficial)andthelessimportantare

the large damages that will not occur in the computer simulations until future

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centuries.Economistsdonotagreeontheappropriatediscountratetouseinsuch

settings, because the usual arguments in favor ofmarket‐basedmeasures (which

would yield a very low SCC) are not as compelling when we cannot bind future

policymakers.10Such are the difficulties in making public policy on the basis of

threatsthatwillnotfullymanifestthemselvesforanothertwogenerations.

If the economic models were updated to more accurately reflect the latest

developmentsfromthephysicalandbiologicalsciences,theestimated“socialcost

of carbon” would likewise decline between one‐third and two thirds,11because

lowertemperatureincreaseswouldtranslateintoreducedclimate‐changedamages.

Thisisasizeableandsignificantreduction.

Then there are problems with the climate models themselves. There is clearly a

large and growing discrepancy between their predictions and what is being

observed,asshowninFigure2.

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Figure2. Five‐yearrunningmeansofthemodelprojections inthe2013 IPCCreportfor the lower troposphere versus both weather balloon and satellite observations.While surface temperatures are compromised by a number of problems, such asurbanizationandobservationaland instrumentalchanges, the satelliteandweatherballoondata—whichclearlyshowthesametemperatures—arelesscompromised.

Our illustration, taken from John Christy of University of Alabama‐Huntsville,12

dramatically shows the climatemodelling problem in a nutshell. It showsmodel‐

predicted and observed temperatures, not at the surface, but in the lower

troposphere, roughly from 5,000 to 30,000 feet. These are less compromised by

earth’scomplicatedsurfaceandman’sroleinalteringit.Moreimportant,though,is

that it is theverticalprofileof temperature thatdeterminesatmospheric stability.

Whenthe“lapserate”,orthedifferencebetweenthelowestlayersandhigherlevels

is large, the atmosphere is unstable. Instability is the principal source for global

precipitation.Whilemodelscanbe(andare)“tuned”tomimicsurfacetemperatures,

thesamecan’tbedoneaseasilyinthevertical.

As the figure indicates, theairabove thesurface iswarming farmoreslowly than

hadbeenpredicted,sothatthedifferencebetweenthesurfaceandtheupperairhas

changed very little. This means that observed global precipitation should be the

sameasitwas.Theforecastwarmingoftheupperlayers(inred)wouldreducethe

surface‐to‐upper air temperature difference, which would tend to reduce

precipitation.

That means that the models themselves are making systematic errors in their

precipitationprojections.Thishasadramaticeffectontheresultantclimate.When

thesurface iswet,which iswhatoccursafter it rains, thesun’senergy isdirected

towards the evaporation of that moisture rather than the direct heating of the

surface. In other words, much of what we call “sensible weather” (the kind of

weatheryoucansense)isdeterminedbytheverticaldistributionoftemperature.If

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thepopularclimatemodelsgetthatwrong(whichiswhat’shappening)thenallthe

subsidiaryweathercausedbyitisalsoincorrectlyspecified.

Therefore there are problems and arbitrariness not just with the economic

assumptions, but with the physical models that are used as input to the SCC

calculations.ThesituationisevenworsethandescribedabovebyPindyck.

So, even though themodelledsensitivitiesaredropping, therearestill indications

thatthemodelsthemselvesaretoohot.Noneofthecurrentbatchof“official”SCC

calculationsaccountsforthis.

Besides the arbitrariness and/ordubious choices for themajor input parameters,

another problem with use of the SCC as a guide to setting carbon taxes is the

problemofleakage.Strictlyspeaking,itwouldmakesense(evenintextbooktheory)

to calibrate only a worldwideanduniformly enforced carbon tax to the SCC. If a

carbon tax is applied only to certain jurisdictions, then emission cutbacks in the

affectedregionarepartiallyoffsetbyincreasedemissions(relativetothebaseline)

in the non‐regulated regions. Depending on the specifics, leakage can greatly

increase the economic costs of achieving a desired climate goal, and thus the

“optimal”carbontaxislowerifappliedunilaterallyinlimitedjurisdictions.

To get a sense of themagnitude of the problems of leakage, consider the results

fromWilliamNordhaus,apioneerintheeconomicsofclimatechange,andcreatorof

the DICE model (one of the three used by the Obama Administration).13After

studying his 2007model runs,Nordhaus reported that relative to the case of the

entire globe enforcing the carbon tax, to achieve a given environmental objective

(suchasatemperatureceilingoratmosphericconcentration)withonly50percent

ofplanetaryemissionscoveredwouldinvolveaneconomicabatementcostpenalty

of250percent.Evenifthetop15countries(byemissions)participatedinthecarbon

tax program, covering three‐quarters of the globe’s emissions, Nordhaus still

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estimated that compliance costs for a givenobjectivewouldbe70percenthigher

thanforthefull‐coveragebaselinecase.14

To see the tremendous problem of limited participation from a different

perspective, one can use the samemodel that EPA uses to calculate the effect of

variouspolicyproposals.TheModelfortheAssessmentofGreenhouse‐GasInduced

ClimateChange(MAGICC)isavailableandeasy‐to‐useontheCatoInstitutewebsite.

MAGICCshowsthateveniftheU.S.linearlyreduceditsemissionstozerobytheyear

2050,theaverageglobaltemperatureintheyear2100wouldbe0.1°C—that’sone‐

tenth of a degree—lower than would otherwise be the case.15Note that this

calculation does not even take into account “leakage,” the fact that complete

cessationofU.S. emissionswould induceothernations to increase theireconomic

activities and hence emissions. Our point in using these results from theMAGICC

modeling isnot tochristen themasconfidentprojections,butrather toshowthat

evenontheirownterms,usinganEPA‐endorsedmodel,Americanpolicymakershave

muchlesscontroloverglobalclimatechangethantheyoftenimply.

U.N.REPORTSCAN’TJUSTIFYPOPULARCLIMATEGOAL

Although the goal’s selection was never formally explained, advocates of

government intervention to mitigate climate change have broadly settled on a

minimumgoal of limiting globalwarming (relative to preindustrial times) to 2°C,

with many pushing for much more stringent objectives (such as limiting

atmospheric greenhouse gas concentrations to 350ppm of CO2). Given the

confidence with which carbon tax advocates refer to the “consensus” among

scientists on the key issues in the climate change debate, the innocent American

public would surely conclude that the periodic reports from the United Nations

Intergovernmental Panel on Climate Change (IPCC) would easily justify

implementationofgovernmentpoliciestohitthe2°Ctarget.

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Ironically, this isnot thecase.Accordingto2013IPCCreport [oftenreferredtoas

“AR5”for“FifthAssessmentReport”],to“likely”limitglobalwarmingto2°Cwould

requirestabilizingatmosphericconcentrationsbetween430‐480ppmbytheyear

2100.16The sameAR5 report shows that achieving this climate goalwould entail

reductions in consumption in the year 2100 of 4.8 percent (which is the central

estimate,andrelativetothebaseline).17Thesearethecostsofachievingthepopular

2°Cgoal,accordingtothelatestU.N.report.

In contrast, to compute the benefitsof the 2°C goal we would need to know the

reduction in climate change damages that would result under business‐as‐usual

versusthemitigationscenario(withthetemperatureceiling).Evenunderthemost

pessimisticemissionscenariowithnogovernmentcontrols (RCP8.5),by2100 the

AR5’s central estimate of global warming is about 4.5°C, and a more realistic

business‐as‐usualscenario(betweenRPC6andRPC8.5)wouldinvolvewarmingby

2100 of less than 4°C.18Therefore the gross benefits of the stipulated mitigation

policyaretheclimatechangedamagesfrom4°Cwarmingminustheclimatechange

damagesfrom2°Cwarming.

Unfortunately, theAR5reportdoesnotallowus tocomputesuch figures,because

just about all of the comprehensive analyses of the impacts of global warming

considerrangesof2.5°C‐3°C.TheAR5doescontainatable19summarizingsomeof

theestimates in the literature,outofwhich themostpromising (forour task)are

two results fromRosonandvanderMensbrugghe’s2012 study.20Theyestimated

that2.3°CwarmingwouldreduceGDPby1.8percent,while4.9°Cwarmingwould

reduceGDPby4.6percent. (Notethat thisparticularestimatewas theonlyone in

theAR5tablethatestimatedtheimpactofwarminghigherthan3.2°C.)

Therefore, using ballpark figures, one could conclude from the AR5 summary of

impacts that limiting climate change to 2°C rather than an unrestricted 4°C of

warming,wouldmeanthattheEarthintheyear2100wouldbesparedabout(4.6‐

1.8)=2.8percentofGDPlossinclimatechangedamages.Incontrast,thesameIPCC

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AR5reporttoldusthattheeconomiccompliancecostsofthemitigationgoalwould

be4.8percentofconsumptionintheyear2100.

Asthisdemonstrationhasshown,evenifwetaketheIPCC’snumbersatfacevalue,

and even assuming away the practical problems that would prevent mitigation

policies from reaching the theoretical ideal, the popular climate goal of limiting

globalwarming to2°Cwouldmost likelyentail greatereconomicdamages than it

would deliver in benefits (in the form of reduced climate change damages). The

pursuitofmoreaggressivegoals,and/ortheuseofimperfectlydesignedpolicytools

to achieve them, would, of course, only make the mismatch between costs and

benefitsevenworse.

“FatTails”andCarbonTaxasInsurance?

Asapostscripttotheseobservations,wenotethattheleadersinthepro‐carbontax

campareabandoningtraditionalcost/benefitanalysisas(allegedly) inappropriate

inthecontextofclimatechange.Forexample,HarvardeconomistMartinWeitzman

haswarnedthatclimatescenariosinvolve“fattails”that(mathematically)makethe

conventionally‐calculatedsocialcostofcarbontendtoinfinity.Weitzmanandothers

havemovedaway fromtreatinga carbon taxasapolicy response toagiven (and

known)negativeexternality,andinsteadlikenittoaformofinsurancepertainingto

acatastrophethatmighthappenbutwithunknownlikelihood.Buttheutilityofsuch

“insurance” is being compromised, given the strong emergingevidence very large

warmingisunlikely.

This approach,which is growing inpopularity among the advocates of aggressive

governmentintervention,hasseveralproblems.Inthefirstplace,thewholepurpose

of the periodic IPCC reports was to produce a compilation of the “consensus”

research in order to guide policymakers. But when the models and methods

containedintheIPCCreportsdonotyieldaggressiveenoughaction,criticssuchas

Weitzmanpointouttheir(admitted)shortcomingsandproposethatpolicymakers

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takeactionsbasedonwhatwedon’tknow.21YetaseconomistDavidR.Henderson

points out, broad‐based uncertainty cuts bothways in the climate change policy

debate.Forexample,itispossiblethattheEarthisheadedintoaperiodofprolonged

cooling, in which case offsetting anthropogenic warming would be beneficial—

meaningthatacarbontaxwouldbeundesirable.22

AnotherproblemwithWeitzman’sapproach—asNordhaus,amongothercritics,has

pointedout23—is that itcouldbeused to justifyaggressiveactionsagainstseveral

catastrophic risks, including asteroids, rogue artificial intelligence developments,

and bio‐weapons. After all, we can’t rule out humanity’s destruction from a

genetically engineered virus in the year 2100, andwhat’sworsewe are not even

surehowtoconstruct theprobabilitydistributiononsuchevents.Doesthatmean

weshouldbewillingtoforfeit5percentofglobalconsumptiontomerelyreducethe

likelihoodofthiscatastrophe?

Thisquestion leads intothefinalproblemwiththe insuranceanalogy:Withactual

insurance, the risks are well‐known and quantifiable, and competition among

insurersprovidesratesthatarereasonableforthedamagesinvolved.Furthermore,

forallpracticalpurposesbuyingtheinsurancepolicyeliminatesthe(financial)risk.

Yettobeanalogoustothetypeof“insurance”thatWeitzmanetal.areadvocating,a

homeowner would be told that there was a roving gang of arsonists whomight,

decades fromnow, sethishomeon fire, thata firepolicywouldcost5percentof

income every year until then, and that even if the house were struck by the

arsonists, the companywould indemnify theowner foronly someof thedamages.

Whowouldbuysuchan“insurance”policy?

CARBONTAXREFORM“WIN‐WINS”?THEELUSIVE“DOUBLEDIVIDEND”

Someproponentsofacarbontaxhavetriedtodecoupleitentirelyfromtheclimate

changedebate.Theyargue that if the receipts froma carbon taxweredevoted to

reductions in taxes on labor or capital, then the economic cost of the carbon tax

18

wouldbe reducedandmightevenbenegative. Inotherwords, they claim thatby

“taxingbads,notgoods,”theU.S.mightexperiencea“doubledividend”inwhichwe

tackleclimatechangeandboostconventionaleconomicgrowth.

Such claims of a double dividend are emphasized in appeals to libertarians and

conservativestoembraceacarbon“taxswap”deal.Forexample,ina2008NYTop

edcallingforarevenue‐neutralcarbontaxswap,ArthurLafferandBobIngliswrote,

“Conservatives do not have to agree that humans are causing climate change to

recognize a sensible energy solution.”24For another example, in his 2015 study

titled, “TheConservativeCase for a CarbonTax,”NiskanenCenter president Jerry

Taylorwrites, “Even if conservativenarratives25about climatechangescienceand

publicpolicyaretosomeextentcorrect,conservativesshouldsay‘yes’toarevenue‐

neutralcarbontax.”26

Theideaofrevenue‐neutral“pro‐growth”carbontaxreformfortheU.S.isarguably

a red herring, as it is very unlikely that any national politically feasible dealwill

respectrevenueneutrality.Onlowerjurisdictions,notethatGovernorJerryBrown

wanted to use California’s cap‐and‐trade revenuefor high‐speed rail,27while the

website for theRegionalGreenhouseGas Initiative (RGGI)—which is the cap‐and‐

tradeprogramforpowerplantsinparticipatingNortheastandMid‐Atlanticstates—

proudlyexplainshowitsrevenueshavebeenspentonrenewables,energyefficiency

projects, and other “green” investments.28And far from insisting on revenue

neutrality, Washington State Governor Jay Inslee wants to install a new state‐

levelcap‐and‐trade levy on carbon emissions to fund his $12.2 billion

transportationplan.29

Ironically enough, even Taylor inhisvery studyappealing toconservatives touts a

non‐revenue‐neutralcarbontax(whichwouldimposeanettaxhikeofatleast$695

billioninitsfirst20years30).Itispossiblethatthiswasamereoversight(i.e.thatin

hisstudyTaylorgenuinelybelievedhewaspushingarevenueneutralplanbutwas

simply ignorant of its details), but all doubts were removed a month later in a

19

NiskanenCenterpostinwhichTaylorwrote:“Butwhatifatax‐for‐regulationswap

were to come up in an attempt to address budget deficits and the looming fiscal

imbalance?….But evenwere those fears realized, conservatives should take heart:

usingcarbontaxrevenuestoreducethedeficitmakesgoodeconomicsense.”31

With progressives enumerating the various “green” investments that could be

fundedbyacarbon tax,andwithevenoneof the leaders in theconservativepro‐

carbon tax camp laying the intellectual foundation for anet taxhike, it shouldbe

clear that a revenue‐neutral deal at the federal level is veryunlikely.However, in

order to drive home just how baseless are the claims that a carbon tax could

somehow deliver a “win‐win,” we should review the results from the academic

economistspublishinginthefield.

Forexample,a2013ResourcesfortheFuture(RFF)study32consideredthedifferent

impacts onGDP fromvariousmethodsof implementing a revenue‐neutral carbon

tax of varying levels. Figure 3 below reproduces their findings for the case of a

$30/tontaxonCO2(in2012dollars)whichiscompletelyrevenueneutral,withthe

funds being returned to citizens through one of four ways: (1) reductions in the

corporateincometaxrateandpersonalincometaxrateondividends,interest,and

capitalgains(blueline),(2)reductionsinthepayrolltaxrateandpersonalincome

tax rate on labor income (red line), (3) reductions in state sales tax rates (green

line), or (4) a lump‐sum payment made to each adult citizen (purple line). The

carbontaxisimposedin2015andrevenueneutralityismaintainedthroughoutthe

scenario.

20

Figure3DifferenceinGDPRelativetoBaselinefromRevenue‐Neutral$30/tonCarbonDioxideTax.SOURCE:2013ResourcesfortheFuturestudy,Figure1TheresultsfromtheRFFmodelingmaysurprisereaderswhoarefamiliarwiththe

“pro‐growth”claimsaboutacarbontaxswapdeal.AsFigure3reveals,allofthetax

swaps reduced GDP relative to the baseline in the beginning. The only way to

eventuallyseea“doubledividend”—wheretheeconomywasstimulatedinaddition

to any environmental benefits from thenew carbon tax—was to refund all of the

revenuesexclusivelythroughoffsettingtaxcutsoncapital.Supposinginsteadthata

completely revenue neutral deal used the carbon tax receipts to fund payroll tax

reductions, Figure 3 shows (red line) that the economy would actually suffer a

permanent reduction of about half a percentage point of GDP. To reiterate, this

result may be very surprising to those familiar with the mantra, “tax bads, not

goods.” To the extent that a U.S. carbon tax were not fully revenue neutral, the

realitywouldbemuchworsethanisdepictedinthetheoreticalidealofFigure3.

ItshouldbestressedthatRFFisarespectedorganizationinthisarenaandit’sfairto

say thatmost of its scholarswould endorsea (suitably designed)U.S. carbon tax;

their team’s modeling results are quite consistent with the academic literature.

21

Indeed,ina2013reviewarticleinEnergyEconomics,StanfordeconomistLawrence

Goulder—one of the pioneers in the analysis of environmental tax analysis—

surveyedtheliteratureandconcluded:

If,priorto introducingtheenvironmentaltax,capital ishighlyovertaxed(in

efficiencyterms)relativetolabor,andiftherevenue‐neutralgreentaxreform

shifts the burden of the overall tax system from capital to labor (a

phenomenon that can be enhanced by using the green tax revenues

exclusively to reduce capital income taxes),then the reform can improve (in

efficiency terms) the relative taxation of these factors.If this beneficial impact is

strong enough, it can overcome the inherent efficiency handicap that (narrow)

environmentaltaxeshaverelativetoincometaxesasasourceofrevenue.

…

Thepresenceorabsenceofthedoubledividendthusdependsonthenatureofthe

prior tax system and on how environmental tax revenues are recycled. Empirical

conditions are important.This does notmean that the double dividend is as

likelytooccurasnot,however.Thenarrowbaseofgreentaxesconstitutesan

inherent efficiency handicap…Although results vary, the bulk of existing

research tends to indicate that even when revenues are recycled in ways

conducive toadoubledividend, thebeneficialefficiency impact isnot large

enoughtoovercometheinherenthandicap,andthedoubledividenddoesnot

arise.[Goulder2013,boldadded.]33

Inshort,Goulder issayingthat thebulkofresearch findsthatevena theoretically

ideal revenue‐neutral carbon tax would probably not promote conventional

economicgrowth(inadditiontocurbingemissions).Theonlywaysucharesult is

even theoretically possible is if the original tax code is particularly distorted in a

certaindimension(suchastaxingcapitalmuchmorethanlabor),andifthecarbon

taxrevenuesarethendevotedtoreducingthatdistortion.

It is important for libertarian and conservative readers—concerned about the

economic impactsofanewcarbontax—tounderstandwhatGouldermeanswhen

heexplainsthatthe“narrowbaseofgreentaxesconstitutesaninherentefficiency

handicap.” If we put aside for the moment concern about climate change, then

22

generallyspeakingitwouldbefoolish(onstandardtaxefficiencygrounds)toraise

revenuebytaxingcarbondioxideemissionsratherthantaxinglabororcapitalmore

broadly.ThetaxonCO2wouldhaveamuchnarrowerbase,meaningthatitwould

take a higher rate of taxation to yield a given dollar amount of revenue. Since

standard analyses suggest that the economic harms of taxes (the “deadweight

losses”) are proportional to the squareof the tax rate, these considerationsmean

thatevenadollar‐for‐dollar tax swap, inwhichanewcarbon tax raised$xwhich

wasthenusedtofundratereductionsin labororcapitaltaxes,wouldnonetheless

increasetheeconomicdragoftheoveralltaxcode.34

The technical phenomenon in the literature driving these results is the “tax

interactioneffect,”inwhichanew“green”tax(suchasacarbontax)interactswith

the pre‐existing, distortionary taxes on labor and capital and makes themmore

damaging.Notethatthecarbontaxraisesconsumerpricesandeffectivelyreduces

theafter‐taxearningsof laborandcapital,actingasitsown(implicit) taxon labor

andcapital,butwiththedifferencethatitisconcentratedinparticularareas,rather

than spread uniformly over all labor and capital. This is the intuition behind the

resultsfoundintheliterature:asageneralrule,evenadollar‐for‐dollarcarbontax

swapdealwillhurttheconventionaleconomy.

Thusweseethatthetypical“pro‐growth”caseforthecarbontaxgetsthingsexactly

backwards:Generallyspeaking, totheextentthattheU.S. taxcodeisalreadyfilled

withdistortions,thecaseforimplementingacarbontaxofaparticularmagnitudeis

actuallyweaker, not stronger, even if we are assuming full revenue‐recycling by

reductionofthosepre‐existing,distortionarytaxes.

In order to illustrate these nuances, as well as to convey the magnitudeof their

importance, in Table 1 below we reproduce the estimates from a numerical

simulation in a pioneering 1996 paper in the American Economic Review by

BovenbergandGoulder.35

23

Assumed Marginal 

Environmental Damages From 

Carbon Emissions ($/ton) 

Textbook Pigovian 

Carbon Tax (Ignoring Other 

Taxes) 

Optimal Carbon Tax from Numerical Model, In Light of Pre‐Existing Taxes, 

when carbon tax receipts… 

…distributed lump‐sum to 

citizens 

…used to reduce rates on personal 

income tax 

$25  $25  $0  $7 

$50  $50  $0  $27 

$75  $75  $13  $48 

$100  $100  $31  $68 Table1.TextbookCarbonTaxvs. “Optimal”CarbonTax,WithPresenceofPriorU.S.Federal Tax Code Distortions (Adapted from 1994 simulation by Bovenberg andGoulder.)

Much of the contemporary U.S. policy debate on climate change restricts its

attentiontothefirsttwocolumnsinTable1above.Thatis,manyanalystsassume

that if the “social cost of carbon” is, say, $25/ton, then the federal government

shouldatleastputa“priceoncarbon”(suchasacarbontax)atalevelof$25/ton,in

ordertoreflectthe“negativeexternality.”

Then, to the extent that consideration is given to pre‐existing taxes which are

themselves distortionary, most analysts—particularly those urging libertarian or

conservative readers to embrace a carbon tax—think it is self‐evident that full

revenue recycling can only enhance the case for a carbon tax, indeed perhaps

makingitsensibleevenifoneneglectstheenvironmentalexternality.Yetthethird

andfourthcolumnsinTable1showthatsuchcommonreasoningisbackwards,36at

least in typical models in this literature: Generally speaking, the presence of

distortionarytaxesreducesthecaseforanewcarbontax,meaningthat(considering

alleconomicandenvironmentalaspects)the“optimal”carbontaxwillendupbeing

lowerthanthesocialcostofcarbon.37

24

The impact of the “tax interaction effect” on policy design can be enormous: For

example,asTable1indicates,inthecaseofa$50socialcostofcarbon,ifthecarbon

taxreceiptsaretobereturnedinlump‐sumfashion,thentheoptimalcarbontax—

with all feedback effects on the tax system taken into account—is zero. This

outcomereflectsthefactthatintroducingevenaverymodestcarbontax(suchasa

mere$1/ton)wouldexacerbate thedeadweight lossesof thepre‐existing taxesso

much that the marginal economic costs swamp the stipulated $50/ton

environmental benefits of the carbon tax, meaning that it would be better—all

things considered—tonot levy even themodest carbon tax in the first place.The

policywonkspushingacarbontaxon libertariansandconservativesalmostnever

include this type of possibility in their discussions, even though (at least

qualitatively)thisistheconsensusviewintheliterature.

Itistruethatgivenacarbontax,itisbettertousethereceiptstoreducetaxrates,

rather thanspending themoneyorreturning it lump‐sumtocitizens.That iswhy

Table1showsthatinthecaseofa$50socialcostofcarbon,theoptimalcarbontax

withpersonalincometaxratereductionis$27.Thus,puttingtheU.S.policydebate

in terms of our Table 1 the analysts pitching a carbon tax to libertarians and

conservatives have been focusing on the fact that $27 > $0 (i.e. it’s better to use

carbon tax receipts to fund tax rate reductions rather than other uses). But they

almostuniversallyignorethefactthat$27<$50,meaningthatcarbontaxesmake

sense only if there are highenvironmental damages from emissions, and even in

that case—and even with a fully revenue‐neutral tax rate swap—we would still

implementonlyacarbontaxmuchlowerthantheassumedsocialcostofcarbon.

ARECARBONTAXESA“MARKETSOLUTION”?

Advocateswilloftenrefertoacarbontax(andalsoacap‐and‐tradeprogram)asa

“marketsolution”totheproblemofhuman‐causedclimatechange,incontrasttothe

command‐and‐control mandates that would directly regulate greenhouse gas

25

emissions.Indeed,suchatax‐for‐regulationswapisacentralplankinJerryTaylor’s

pitch for a carbon tax to libertarians and conservatives. According to textbook

theory, it is cheaper for society to achieve a desired emission reduction through

putting a “price on carbon” and letting individuals in the market determine the

specificareasof cutbacks, rather than political officials mandating fuel economy

standards,powerplantrules,buildinginsulationstandards,andsoon.

Thereareseveralflawswithsuchapitch.Inthefirstplace,evenonitsownterms,a

carbontaxishardlyagenuine“marketsolution”analogoustootherintroductionsof

propertyrights.Theclassic“tragedyofthecommons”involvedanimalsovergrazing

on English pastureland, and this problem was solved by establishing private

property in real estate (enforced at low costs via barbedwire fencing). But ifwe

were to implement a “market solution” in the spirit of a carbon tax, the English

government would have fined only English ranchers and shepherds a certain

number of guineas for every acre‐year of grazing by their animals,with that fine

periodicallyadjustedbasedonthewhimsofParliament,andwhereanynon‐English

rancherorfarmercouldlethisanimalsgrazeonEnglishpasturelandwithoutpaying

anything to the government. (No fences would be allowed to restrict foreign

ranchers,whofelloutsidethejurisdictionoftheEnglishgovernment,fromcoming

intoEnglandandgrazingonthelandthattheEnglishweretryingtopreserveforthe

future.)Wouldthisbea“marketsolution”totheoriginaltragedyofthecommons?

Another problem with the idea of a carbon‐tax‐for‐regulation swap is that

progressive environmentalists would be, on their own terms, foolish to go along

with suchabargain.DavidRoberts, in aVox interviewwith JerryTaylor, gets the

Niskanen Center president to estimate that the true social cost of carbon dioxide

emissions (including the “fat tails” catastrophic risks described byWeitzman and

othersthatareincreasinglyinappropriate)ranges“anywherefrom,say,$70to$80

atontoacouplehundreddollarsaton,”andTaylorfurtheragreeswithRobertsthat

any politically feasible U.S. carbon tax will be “almost certainly well south” of

$70/ton.38Whythenwouldanyprogressivegiveupdirectregulatorytools,ifaU.S.

26

carbontax—especiallyinthebeginning,whenmuchoftheworldcontinuestoemit

without constraint—will be nowhere near the level needed to achieve the

(stipulated)emissioncutbacksfora2°Cgoal,letaloneamoreaggressivegoalsuch

as 350ppm? In the interview, Taylor answers that even amodest carbon taxwill

achievemoreemissioncutbacks thanparticularregulatory interventions,buthow

wouldthatsatisfysomeoneworriedaboutcatastrophicriskstofuturegenerations?

It would simply underscore the need to pursue further command‐and‐control

regulationsinconjunctionwiththe(inadequate)carbontax.

Theideathatprogressiveenvironmentalistswouldwantacarbontaxtosupplement

directmandatesisclearasday:itiswhattheyareannouncingtotheworld.Forjust

oneexample, thegroupCleanEnergyCanada inearly2015publishedapamphlet,

“HowtoAdoptaWinningCarbonPrice:TopTenTakeawaysfromInterviewswith

theArchitectsofBritishColumbia’sCarbonTax.”39Hereistakeaway#8:“Acarbon

taxcan’tdoeverything;itneedstobejustonecomponentofafullsuiteofclimate

policies.” (A post on the U.S. progressivewebsite grist.com favorably covered the

releaseofthepamphlet,wheretheauthor—thesameDavidRoberts—commented,

“Icertainlyhope[carbon]taxadvocatestakeheedofNo.8!”40)Wewillreturntothe

celebratedcaseofB.C.’scarbonlaterinthisstudy,butfornowitservestomakethe

point that the proposal to replace top‐down regulations with a carbon tax is a

fantasy. Progressives aren’t even agreeing to that inprinciple. How, then, can we

expectthemtogoalongwithsuchadealinpractice?

Finally,tolinkthediscussionintheprecedingsectionwiththisone,wenotethata

2010RFFanalysisconcludedthatthetaxinteractioneffectcouldbesopowerfulas

todominatethetextbookadvantagesofamarket‐basedapproach.Intheirwords:

Theincreaseinenergypricescausedbymarket‐basedclimatepoliciescauseshigher

production costs throughout the economy, which in turn leads to a slight

contraction in theoverall levelofeconomicactivity, employment, and investment.

As a result,distortions in laborandcapitalmarketsdue topreexisting taxes

27

are increased, producing an economic cost. This cost is larger formarket‐

basedinstrumentsbecausetheytendtohaveamuchgreaterimpactonenergy

pricesthanemissionsstandards,forenvisionedCO2reductionsoverthemedium

term.[RFF2010,boldadded.]41

To be sure, this 2010 RFF analysis still favored a carbon tax with full revenue

recyclingthroughothertaxratereductionsasthebestpolicy.Butifforcedtochoose

between a direct kilowatt‐hour emission mandate on the power sector, versus a

politicallyrealisticcap‐and‐tradeprogramcontainingsubstantialamountsof“free”

allowances toease theburdensoncertaingroups, theRFFstudyactually rejected

the cap‐and‐trade “market solution” ashaving economic costs200percenthigher

than the command‐and‐control mandates. Such an outcome doesn’t occur in a

simplistic textbook analysis that disregards the existing tax code, but in the real

worldall“marketsolutions”—whethercap‐and‐tradeoracarbontax—raiseenergy

pricesandthusrenderpre‐existingtaxesmuchmoredestructive.

CASESTUDIES:CARBONTAXESINACTION

AsofNovember,2014,therewereatleast39distinctprogramsaroundtheworldto

“price” someportion of their carbondioxide emissions, consistingof a tax, a cap‐

and‐tradeprogram,orahybridofthetwoapproaches.Intermsoftime,thiscount

ranges from Finland’s carbon pricewhich became effective as of 1990, to Chile’s

planwhichwillbegin in2017,and in termsofprices this count includeseffective

carbonpricesrangingfrom$1pertonupto$168/ton(inSweden,butwithmajor

exemptions and rebates for certain businesses).42In the interest of brevity, this

study will explore the history of two prominent examples of real‐world carbon

taxes,inAustraliaandBritishColumbia.

Australia

28

On July 1, 2012, the Australian government instituted a carbon tax of $23

(Australian dollars) per ton of CO2‐equivalent, and raised it to $24.15/ton a year

later.ThetaxprovedsounpopularthatintheSeptember2013elections,Leaderof

the Opposition Tony Abbott won on a campaign which he explicitly billed as a

referendumonthecarbontax. (Thecarbonpricingschemewas formallyended in

July 2014.43) Dr. Alex Robson, an economics professor from Griffith University in

Brisbane,Australiawhohaspublishedpeer‐reviewedpaperson the interactionof

fiscalandenvironmentalpolicies,44authoreda2013studycriticaloftheAustralian

carbontax.45

Robson’sstudyshowsthattheintroductionoftheAustraliancarbontaxwenthand

inhandwithaspikeinhouseholdelectricityprices(the“highestquarterlyincrease

on record,” p. 39) and unemployment, while many Australian business owners

anecdotallyreportedthatthecarbontaxwasakeyfactorintheirdecisiontolayoff

workersorshutdownentirely.Yetbeyondthesedrawbacks—whichhelptoexplain

thevoters’ embraceofTonyAbbott in2013—Robson’s study reveals thatnoneof

thepillarsinthe“conservativecase”foraU.S.carbontaxswapcametrueinthecase

ofAustralia.

Forexample,contrarytothepromisethataU.S.carbontaxcouldbeusedtoprovide

“pro‐growth”taxreform,inAustraliathecarbontaxwasaccompaniedbysomany

give‐aways(tomitigatethenegativeimpactonvariousgroups)thattheAustralian

government actually raised effective marginal income tax rates on 2.2 million

taxpayers,comparedtoincometaxreductionsforonly560,000taxpayers.

In thesamevein, rather thanallowing forareduction in top‐downenvironmental

policyasispromisedintheU.S.,theAustraliancarbontaxwasnotaccompaniedby

anyreformoftheirinefficientwindandsolarsubsidies,orRenewableEnergyTarget

(RET)mandates.Onthecontrary,Australia’scarbontaxwasinstitutedalongwitha

“CleanEnergyFinanceCorporation.”

29

Finally,advocatesclaimthataU.S.carbontaxwillestablishapredictable“price”for

carbon that firms can incorporate into their long‐term investment plans. Yet in

Australia, the carbon tax was a comedy of errors. Originally the government

promisedduringthe2010campaignthatitwouldnotimplementacarbontaxinthe

next 3‐year cycle. This promise was abandoned, as the carbon tax was in fact

introduced in July 2012, with a planned transition to a cap and trade scheme in

2015.Laterthegovernmentproposedtomovetothecapandtradeschemeayear

ahead of time, but this was never formalized, leaving the business community

uncertain. And of course, with the September 2013 election of Abbott, the policy

wasupended again,withAustralia’s carbon tax being abolished in July 2014.The

real‐worldcaseofAustraliashowsthatachievingacarbontaxmostcertainlydoes

notprovide “policy certainty” to allow businesses to confidently make long‐term

decisions.

BritishColumbia

The Canadian province established a C$10/ton carbon tax in 2008, which was

ramped up gradually until maxing out at C$30/ton (or US$24/ton using current

exchangerates)inJuly2012.46Thisworksouttoabout6.7CDNcentsperliter47of

gasoline, or about 21 US¢ per gallon. The tax is quite broad, with the B.C.

government claiming that its “carbon tax applies to virtually all emissions from

burning fuels, which accounts for an estimated 70 per cent of total emissions in

British Columbia.” 48 Of special interest to the U.S. policy debate among

conservativesandlibertariansisthattheB.C.carbontaxwasexplicitlydesignedto

berevenueneutral,withthegovernmentperiodicallyreportingonhowthecarbon

taxreceiptshavebeenreturnedtoB.C.residentsviaothertaxcuts.49

ManyproponentsofaU.S.carbontaxpointtotheexampleofBritishColumbiaasa

model, which (they claim) shows that a properly designed carbon tax has

significantly reduced B.C. emissions while apparently leaving the B.C. economy

unscathed. For example, Yoram Bauman (of “standup economist” fame) is a PhD

30

authorof a cartoonbook explaining the economics of climate change,50while Shi‐

LingHsuisaPhDeconomistandtheexpertoncarbontaxswapsfortheNiskanen

Center.51Thus it is fair to say that these two men are experts who have been

pushingacarbontax,onecomingfromtheprogressiveleftandtheotherfromthe

conservative right. In a 2012 op ed in the New York Times, here is how they

describedtherelevanceoftheB.C.carbontaxtotheU.S.policydebate:

On Sunday, the best climate policy in the world got even better: British

Columbia’scarbontax—ataxonthecarboncontentofall fossil fuelsburnedin

theprovince—increasedfrom$25to$30permetrictonofcarbondioxide,making

itmoreexpensivetopollute.

…

AcarbontaxmakessensewhetheryouareaRepublicanoraDemocrat,aclimate

changeskepticorabeliever,aconservativeoraconservationist(orboth).Wecan

move past the partisan fireworks over global warming by turning British

Columbia’scarbontaxintoamade‐in‐Americasolution.[BaumanandHsu,bold

added.]52

Other examples could be cited to show that B.C. is one of the prime exhibits

(allegedly)showingthatarevenue‐neutralcarbontaxcanreduceemissionswithout

impairingeconomicgrowth.53Inthissection,wechallengebothclaims.

Onepopular2012econometricanalysisoftheB.C.episodeconcludedthatitscarbon

taxreducedemissionsfromgasolineaboutfivetimesasmuchaswouldbeexpected

from comparable, market‐induced increases in gasoline prices.54The authors

hypothesize that this result is due to B.C. residents being willing to cut back on

drivingintheefforttomitigateclimatechange,solongastheirfellowB.C.residents

can’tfreerideofftheirsacrifices.Theproblemwiththistheory,however, isthatit

would indicate very poor reasoning on the part of B.C. residents: the rest of the

world,notsubjecttoB.C.’scarbontax,canstillfreerideoffofanyB.C.cutbacks.

31

AmuchmoreplausibleexplanationfortheeconometricresultsisthatB.C.residents

are (at least partially) buying gasoline in other jurisdictions. Note that amarket‐

inducedriseinpumppricesinB.C.wouldnotleadtothiseffect,becausepresumably

gaspricesinneighboringAlberta(onB.C.’seasternborder)orWashingtonState(to

the south) would be affected too by a change in the world supply and demand.

However,whenB.C.residentsseetheirgaspricesrisebecauseoftheB.C.carbontax,

then(otherthingsequal)wewouldexpectgasolineinotherjurisdictionstobecome

relativelymoreattractive.

Although pro‐carbon tax writers have tried to downplay the significance of the

results,thedatadoindicateasharpincreaseincross‐bordertrafficbetweenBritish

ColumbiaandWashingtonState,astheB.C.carbontaxwas implemented.Figure4

showsvarioustrendsincross‐bordervehicletrafficexpressedasanindexrelative

toyear2007levels.

Figure 4. Select US/Canadian Vehicle Border Crossings, Annual, 1998‐2014, Index2007=100.

As Figure 4 indicates, there was a pronounced increase in Canadian vehicle

crossings of the B.C./Washington State border after the B.C. carbon tax was

0.00

0.50

1.00

1.50

2.00

2.50

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

USvehiclesenteringCan

CDNVehiclesReturningCan

USvehiclesenteringON

CDNvehiclesreturningON

USvehiclesenteringBC

CDNvehiclesreturningBC

32

introduced(inJuly2008).Thissurgecannotbedueto,say,changesintheCDN/USD

exchange rate, because we don’t see nearly the same rise in Canadian vehicles

returningtoeitherCanadaasawhole,orOntarioinparticular.(Vehiclesreturning

toB.C.wereup136percent in2013 relative to2007 levels,while inOntario they

were up only 22 percent. The actual number of returning B.C. vehicles was 3.2

million in 2007 and 7.6 million in 2013, compared to a total British Columbia

populationofabout4.6millionin2013.55)Furthermore,thesurgecan’tbedue(as

somehavesuggested)tochangesinborderflexibility,becausewedon’tseenearly

as much of a relative surge in U.S. traffic at the B.C. border relative to other

checkpoints.

Anothersignificantpointisthatevenifnotastatisticalartifact,theapparentlylarge

reductioninB.C.emissionswasonlytemporary.Thestudiestrumpetingthepotency

ofB.C.’s carbon taxwent only up through2012data.However, officially reported

B.C.gasolinesalesincreasedsharplyin2013and2014,suchthatasof2014,annual

percapitaB.C.gasolinesalesweredownonly2percentcompared to2007,which

wasonlyapercentagepointlowerthantherestofCanada.56(SeeFigure5.)Onthis

criterion it seemsB.C.’s carbon taxhadaveryweak long‐term impactongasoline

consumption,evenifweignorethesignificant“leakage”problem.

33

Figure5.PerCapitalOfficialGasolineSales inB.C.vs.RestofCanada,Annual,2005‐2014,Index2007=100.

TurningtotheclaimthatB.C.’scarbontaxdidnotharmitsconventionaleconomy

(because B.C. has matched overall Canadian growth since 2008), there is one

awkwardproblem:theB.C.economywasoutperformingtherestofCanadapriorto

thecarbontax.Specifically,from2003–2008,B.C.realoutputgrewbyacumulative

18.6%,whereasCanadian realGDPgrewbyonly12.7%. In contrast, from2008–

2013 (the latest annual figure available),B.C. output grewby8.0%,whileCanada

grewby7.7%.57

Weseeasimilarpatterninthelabormarket.Inthefiveyearsbeforeintroductionof

theB.C.carbontax,theaverageunemploymentrateinB.C.was5.6%,comparedtoa

Canadianaverageof6.6%.ButinthefiveyearsaftertheB.C.carbontaxbegan,the

averageunemploymentrateinB.C.was7.1%comparedto7.6%inCanadaoverall.58

ThusthelabormarketadvantageofB.C.versusCanadawascutinhalfifwelookat

thefive‐yearperiodsbeforeandafterintroductionoftheB.C.carbontax,whichwe

haveillustratedinFigure6.59

0.86

0.88

0.90

0.92

0.94

0.96

0.98

1.00

1.02

1.04

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

BC

Can‐BC

34

Figure6. UnemploymentandRealGrowthRates,AnnualAverages,B.C.vs.Canada,2003–2013.

Asafinaltwist,wenotethattheB.C.authoritiesreportthattheyactuallyprovided

net tax cuts in conjunction with the “revenue neutral” carbon tax, presumably

because theydidnot anticipate the sharp fall in gasoline sales in the region.60(In

otherwords,theygavetoogeneroustaxcuts,becausetheyassumedthecarbontax

receiptswouldbehigherthanturnedouttobethecase.)Furthermore,theB.C.tax

cutsareamixtureofratereductionsandlump‐sumpayments(thelatterdirectedto

low‐incomegroupswhowouldbeharmedbyrisingenergyprices).Indeed,although

proponents claim that the B.C. carbon tax swap has yielded the lowest personal

incometaxratesinCanada,suchclaimsrefertotheaverageeffectiverates.Interms

ofmarginalbrackets—whatreallymattersas farassupply‐sideeconomicanalysis

ofincentives—in2014BritishColumbiahadsixincometaxbrackets,rangingupto

16.8%,while neighboringAlberta had a flat income tax of 10%.61Thenotion that

B.C.isnowasupply‐sidepowerhousebecauseofitscarbontaxisfarfromreality.

In summary,whenwe look atBritishColumbia—thehands‐downbest real‐world

example of a carbon tax swap, according to proponents—we find that even the

officialfiguresshowB.C.hashadonlyamodestreductioningasolineconsumption

‐4.0%

‐2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

BCUnRate

CDNUnRate

BCGrowth

CDNGrowth

35

relative to the rest of Canada, and that these official figures are plagued by

significant “leakage” into other jurisdictions, which may have led authorities to

provide larger tax cuts than they had intended. Furthermore, B.C.’s offsetting tax

cutswerenotdesignedfromasupply‐sideperspective,astheyincludedlump‐sum

transferstolow‐incomegroups.Indeed,inpracticetheevidencesuggeststhateven

withtheassociatednettaxcuts,B.C.unemploymentandrealeconomicgrowthrates

sufferedafterthecarbontaxwasenacted.InasmuchasanyU.S.carbontaxwillnot

be revenue neutral—let alone be phased in with net tax cuts—the B.C. example

leads us to expectmodest changes in gas consumption in exchange for aweaker

economy.

CONCLUSION

A growing drumbeat of media reports on the dangers of human‐caused climate

change,inconjunctionwiththerejectionof“sciencedeniers”frompolitecompany,

has ledsomeAmericans tobelieve thataggressiveU.S.governmentaction toslow

carbondioxideemissionsisaself‐evidentlyjustifiedpolicy.Furthermore,ahandful

of vocal intellectuals and political officials have begun warming libertarians and

conservativesuptothepossibilityofa“win‐win”taxswapdeal,whichwouldgive

themdesiredreductionsinothertaxesandregulationsinexchangeforconcedingto

acarbontax.

This study has shown just how dubious this popular narrative is. Indeed, many

proponentsofacarbontaxare“denying”agrowingbodyoflow‐sensitivityfindings,

aswellasalargeandgrowingdiscrepancybetweenclimatemodelpredictionsand

temperature observations in the lower atmosphere. Furthermore, relying on

standardresultsintheeconomicsofclimatechangeliterature,wehaveshownthat

thereareseriousproblemsintheestimationofthe“socialcostofcarbon,”andthat

even ifweknewit,otherconsiderationswould imply thatan “optimal”carbon tax

shouldbesignificantlylowerthantheestimated“socialcostofcarbon.”

36

Of particular relevance to libertarians and conservatives,we further showed that

the “tax interaction effect” suggests that theremost likelywouldnotbe adouble‐

dividend boost to conventional economic growth, even if a carbon taxwere fully

refunded through payroll tax cuts or lump‐sum payments. In the more realistic

scenario inwhichacarbontaxwouldonlypartiallyberefunded,theresultsaren’t

evenclose:suchataxwouldclearlyhurttheconventionaleconomy,meaningthatit

couldonlybejustifiedonenvironmentalgrounds.

Finally,wecriticallyanalyzedthereal‐worldcarbontaxexperiencesinAustraliaand

BritishColumbia.Wefoundthatthepromisesofa“market‐friendly”U.S.carbontax

wereviolatedinbothcases.EveninthecaseofBritishColumbia—hailedbycarbon

tax advocates as the best example to date—after an initial drop, the tax has not

yieldedsignificantreductionsingasolinepurchases,whileithasapparentlyreduced

theB.C.economy’sperformancerelativetoCanada.

Libertariansandconservativesinparticularshouldnotsimplytrusttheassurances

fromtheadvocatesofacarbontax,butshouldinsteadreadtherelevant literature

themselves. Inboth theoryandpractice, aU.S. carbon tax remainsaverydubious

policyproposal.

1Theoriginalsocialcostofcarbon(SCC)estimatesfromtheObamaAdministrationInteragencyWorkingGroup(IWG)werepublishedin,“TechnicalSupportDocument:SocialCostofCarbonforRegulatoryImpactAnalysis–UnderExecutiveOrder12866,”InteragencyWorkingGrouponSocialCostofCarbon,U.S.government,February2010,availableat:http://www.epa.gov/oms/climate/regulations/scc‐tsd.pdf.AmajorupdatetotheestimateswasissuedinMay2013,availableat:https://www.whitehouse.gov/sites/default/files/omb/inforeg/social_cost_of_carbon_for_ria_2013_update.pdf.Asofthiswriting,thelatestestimateswerereleasedonJuly2015,availableat:https://www.whitehouse.gov/sites/default/files/omb/inforeg/scc‐tsd‐final‐july‐2015.pdf.2OMBCircularA‐4(September17,2003)regardingRegulatoryAnalysis.3Therewere10studieswith21experiments,from42authorsavailabletotheIWGforits2013update.

37

4Roe,G.,andM.Baker,2007.Whyisclimatesensitivitysounpredictable?Science318,629‐632.5Ring, M.J., et al., 2012. Causes of the global warming observed since the 19th century. AtmosphericandClimateSciences, 2, 401-415, doi: 10.4236/acs.2012.24035.6 Spencer, R. W., and W. D. Braswell, 2013. The role of ENSO in global ocean temperature changes during 1955-2011 simulated with a 1D climate model. Asia-Pacific Journal of Atmospheric Science, doi:10.1007/s13143-014-0011-z. 7RobertPindyck,“ClimateChangePolicy:WhatDotheModelsTellUs?”JournalofEconomicLiterature,September2013,p.5,NBERversionavailableat:http://web.mit.edu/rpindyck/www/Papers/Climate‐Change‐Policy‐What‐Do‐the‐Models‐Tell‐Us.pdf.8TheWhiteHouseTechnicalSupportDocumentontheSocialCostofCarbon,afteritsJuly2015revision,isavailableat:https://www.whitehouse.gov/sites/default/files/omb/inforeg/scc‐tsd‐final‐july‐2015.pdf.9ForacomprehensivediscussionoftheSCCanddiscountrates,seetheInstituteforEnergyResearch’sCommentontheTechnicalSupportDocument,submittedtotheOfficeofManagementandBudgetinFebruary2014,availableat:http://instituteforenergyresearch.org/wp‐content/uploads/2014/02/IER‐Comment‐on‐SCC.pdf.10SomestandardreferencesshowcasingvariousperspectivesinthediscountingliteratureareRobertC.Lind(ed.),DiscountingforTimeandRiskinEnergyPolicy.(Washington,D.C.:ResourcesfortheFuture),1982;andPaulR.PortneyandJohnP.Weyant(eds.),DiscountingandIntergenerationalEquity(USA:ResourcesfortheFuture),1999.11Waldhoff, S., Anthoff, D., Rose, S., and R.S.J. Tol, 2011. The marginal damage costs of different greenhouse gases: An application of FUND. Economics, The Open-Access E-Journal, No. 2011-43, http://www.economics-ejournal.org/economics/discussionpapers/2011-4312TestimonyofJohnChristytotheCommitteeonNaturalResources,U.S.HouseofRepresentatives,May15,2015.13Itistruethatinthetexttothispoint,wehaveseriouslyquestionedtheaccuracyofIAMssuchasNordhaus’DICEmodel.However,wearemerelyillustratingthequantitativesignificanceof“leakage”intermsofthestandardmodelsthemselves,toshowthatevenonitsownmerits,thecaseforaU.S.carbontaxisweakerthanthepublichasbeenledtobelieve.14WilliamNordhaus,AQuestionofBalance:WeighingtheOptionsonGlobalWarmingPolicies(NewHaven,CT:YaleUniversityPress),2008,p.19.15Thecalculatorisavailableat:http://www.cato.org/blog/current‐wisdom‐we‐calculate‐you‐decide‐handy‐dandy‐carbon‐tax‐temperature‐savings‐calculator.Theestimatereliesona3°Cclimatesensitivityassumption.16SeeIPCCAR5WorkingGroupIII,TechnicalSummary,p.25,availableat:http://report.mitigation2014.org/drafts/final‐draft‐postplenary/ipcc_wg3_ar5_final‐draft_postplenary_technical‐summary.pdf.

38

17SeeIPCCAR5WorkingGroupIIISummaryforPolicymakers,TableSPM.2,p.16,availableat:http://report.mitigation2014.org/spm/ipcc_wg3_ar5_summary‐for‐policymakers_approved.pdf.18SeeFigure12‐40,IPCCAR5WorkingGroupI.19SeeTable10.B.1fromAR5WorkingGroupII,p.82.20RobertoRosonandDominiquevanderMensbrugghe,“ClimateChangeandEconomicGrowth:ImpactsandInteractions,”InternationalJournalofSustainableEconomy4(3):2012,pp.270–85.21MartinL.Weitzman,“OnModelingandInterpretingtheEconomicsofCatastrophicClimateChange,”TheReviewofEconomicsandStatistics,February2009,91(1),pp.1‐19,availableat:http://www.mitpressjournals.org/doi/pdf/10.1162/rest.91.1.1.22DavidR.Henderson,“UncertaintyCanGoBothWays,”Regulation,EnergyandEnvironment,CatoInstitute,Summer2013,pp.50‐51,availableat:http://object.cato.org/sites/cato.org/files/serials/files/regulation/2013/6/regulation‐v36n2‐1‐5.pdf.23WilliamNordhaus,“AnAnalysisoftheDismalTheorem,”CowlesFoundationDiscussionPaperNo.1686,January20,2009.24BobInglisandArthurLaffer,“AnEmissionsPlanConservativesCouldWarmTo,”NewYorkTimes,December28,2008,availableat:http://www.nytimes.com/2008/12/28/opinion/28inglis.html.25ItisunclearwhatTaylormeanshere.26JerryTaylor,“TheConservativeCaseforaCarbonTax,”NiskanenCenter,March23,2015,p.2,availableat:http://niskanencenter.org/wp‐content/uploads/2015/03/The‐Conservative‐Case‐for‐a‐Carbon‐Tax1.pdf.27See:http://blogs.sacbee.com/capitolalertlatest/2014/01/jerry‐brown‐eyes‐cap‐and‐trade‐money‐for‐high‐speed‐rail.html.28See:http://www.rggi.org/rggi_benefits.29See:http://crosscut.com/2014/12/inslee‐carbon‐tax‐fund‐transportation‐john‐stang/.30ThedetailsofTaylor’s$695billionoversightareexplainedat:http://instituteforenergyresearch.org/analysis/jerry‐taylor‐strikes‐out‐again‐on‐carbon‐tax/.31See:https://niskanencenter.org/blog/should‐carbon‐tax‐revenue‐be‐used‐to‐retire‐debt/.32JaredC.Carbone,RichardD.Morgenstern,RobertonC.WilliamsIII,andDallasBurtraw,“DeficitReductionandCarbonTaxes:Budgetary,Economic,andDistributionalImpacts,”ResourcesfortheFuture,August2013,availableat:http://www.rff.org/RFF/Documents/RFF‐Rpt‐Carbone.etal.CarbonTaxes.pdf.33LawrenceH.Goulder,“ClimateChangePolicy’sInteractionswiththeTaxSystem,”EnergyEconomics40(2013):S3‐S11,availableat:http://web.stanford.edu/~goulder/Papers/Published%20Papers/Climate%20Change%20Policy's%20Interactions%20with%20the%20Tax%20System.pdf.34Acommenteronanearlydraftpointedoutthattheimpactofhighertaxratesissomewhatmitigatediftheobjectofthenewtaxhasademandthatismoreinelastic

39

thanfortheoriginalscenario.Theintuitionisthatdeadweightlossoccurswhenconsumersandproducersnolongerexploitgainsfromtradeonasmanyunitsasbefore.Nonetheless,becausethebaseissmalleroncarbon‐intensiveactivities,wearestillcomparingahighertaxrateontherelativelyinelasticactivitiestoalowertaxrateontherelativelyelasticones.Inanyevent,theconsensusofthegeneralequilibriumsimulationsisthatcarbontaxesdoinfacthinderconventionalgrowthmorethanothercommontaxes.35A.LansBovenbergandLawrenceH.Goulder,“OptimalEnvironmentalTaxationinthePresenceofOtherTaxes:GeneralEquilibriumAnalyses,”AmericanEconomicReview86(1996):985‐1000.ThetableinthetextisadaptedfromTable2(intheappendix)fromtheir1994NBERWorkingPaperNo.4897versionofthearticle,availableat:http://www.nber.org/papers/w4897.Notethatourtableusestheir“realisticbenchmark”PITratereductionandlump‐sumscenarios.36Acommenterpointedoutthatthetableexcludestheanalysisofrecyclingthecarbontaxreceiptsthroughtaxratereductionsoncapital.Thisistrue,butthepointwearemakingwiththetableisthattheintuitionofsomepro‐carbon‐taxwritersissimplywrong.37BovenbergandGoulderexplicitlymodelchangesinthedeadweightlossesfromthepre‐existingtaxcode,toseetheeffectonoptimalcarbontaxes.Inthecaseofastipulated$75/tonsocialcostofcarbon,ourtableinthetextshowstheresultthatarevenue‐neutralPITtaxswapimpliesanoptimal$48/toncarbontax.Thisresult(werecall)wascalibratedtothePITandothertaxratescircatheearly1990s.ButBovenbergandGouldershowinTable3oftheirNBERworkingpaperthatifmarginalPITrateshadinfactbeen50percenthigher,thenthenewoptimalcarbontax—withfullPITrevenuerecycling—woulddropfrom$48to$34/ton.Torepeat,thisshowsthatthereasoningofmanypro‐carbontaxanalystsisbackwards:themoredistortionarytheU.S.taxcodeisoriginally,thelessnetbenefitsthatflowfromintroducingarevenue‐neutralcarbontax.38DavidRoberts,“Alibertarianmakesthecaseforacarbontax,”Vox,May13,2015,availableat:http://www.vox.com/2015/5/13/8594727/conservative‐carbon‐tax.39Availableat:http://cleanenergycanada.org/wp‐content/uploads/2015/02/Clean‐Energy‐Canada‐How‐to‐Adopt‐a‐Winning‐Carbon‐Price‐2015.pdf.40DavidRoberts,“WhatwecanlearnfromBritishColumbia’scarbontax,”grist,February23,2015,availableat:http://grist.org/climate‐energy/what‐we‐can‐learn‐from‐british‐columbias‐carbon‐tax/.41IanParryandRobertonC.WilliamsIII,“IsaCarbonTaxtheOnlyGoodClimatePolicy?OptionstoCutCO2Emissions,”ResourcesfortheFuture,Resources176,Fall2010,availableat:http://www.rff.org/Publications/Resources/Pages/Is‐a‐Carbon‐Tax‐the‐Only‐Good‐Climate‐Policy‐176.aspx.42InformationonworldwidecarbonpricingprogramstakenfromKristinEberhard,“AlltheWorld’sCarbonPricingSystemsinOneAnimatedMap,”SightlineDaily,November17,2014,availableat:http://daily.sightline.org/2014/11/17/all‐the‐worlds‐carbon‐pricing‐systems‐in‐one‐animated‐map/.

40

43RobTaylorandRhiannonHoyle,“AustraliaBecomesFirstDevelopedNationtoRepealCarbonTax,”WallStreetJournal,July17,2014,availableat:http://www.wsj.com/articles/australia‐repeals‐carbon‐tax‐1405560964.44AlexRobson’spublicationsarelistedat:http://www.griffith.edu.au/business‐government/griffith‐business‐school/departments/department‐accounting‐finance‐economics/staff/dr‐alex‐robson.45AlexRobson,“Australia’sCarbonTax:AnEconomicEvaluation,”September2013,InstituteforEnergyResearch.Availableat:http://instituteforenergyresearch.org/wp‐content/uploads/2013/09/IER_AustraliaCarbonTaxStudy.pdf.46See:http://www.fin.gov.bc.ca/tbs/tp/climate/carbon_tax.htm.47See:http://www.sbr.gov.bc.ca/documents_library/bulletins/mft‐ct_005.pdf.48See:http://www.fin.gov.bc.ca/tbs/tp/climate/A6.htm.49Forexample,thelatestBritishColumbiaBudgetandFiscalPlan(2015/16–2017/18)showsonTable1(page60)its“RevenueNeutralCarbonTaxReport”forthe2013/14‐2014/15fiscalyears,detailingtherevenuescollectedandtheoffsettingtaxcutsprovided.See:http://bcbudget.gov.bc.ca/2015/bfp/2015_Budget_and_Fiscal_Plan.pdf.50ForacriticaldiscussionofBauman’s(withGradyKlein)TheCartoonIntroductiontoClimateChange,seeBryanCaplan’sMay2014EconLogpostat:http://econlog.econlib.org/archives/2014/05/the_cartoon_int.html.51ForanexampleofShi‐LingHsu’sarticlesoncarbontaxswapssee:https://niskanencenter.org/blog/a‐carbon‐for‐corporate‐tax‐swap/.52YoramBaumanandShi‐LingHsu,“TheMostSensibleTaxofAll,”NewYorkTimes,July4,2012,availableat:http://www.nytimes.com/2012/07/05/opinion/a‐carbon‐tax‐sensible‐for‐all.html.53Forexample,see“BritishColumbia’sCarbonTaxShift:TheFirstFourYears,”SustainableProsperity,June2012,availableat:http://www.sustainableprosperity.ca/sites/default/files/publications/files/British%20Columbia's%20Carbon%20Tax%20Shift.pdf,and“BritishColumbia’sCarbonTax:TheEvidenceMounts,”TheEconomistblogpost,July31,2014,availableat:http://www.economist.com/blogs/americasview/2014/07/british‐columbias‐carbon‐tax.54NicholasRiversandBrandonSchaufele,“SalienceofCarbonTaxesintheGasolineMarket,”October22,2014,SSRNWorkingPaper,availableat:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2131468.55Somehavearguedthatthecross‐borderstatisticsdonotaffectthegenerallessonsoftheB.C.carbontaxepisode.Seeforexample:http://critical‐angle.net/2013/08/18/the‐effect‐of‐cross‐border‐shopping‐on‐bc‐fuel‐consumption‐estimates/.56CalculationsofB.C.andrest‐of‐CanadagasolinesalesbasedonStatisticsCanadaTable134‐0004,“Retailsalesofmotorgasoline.”PopulationfiguresfromTable051‐0001.57Percentagesbasedonchained2007CDNdollarsasreportedbyStatisticsCanada.

41

58UnemploymentdatafromStatisticsCanada,Table282‐0087.Theaveragesarebasedonthemonthlydata,i.e.July2003throughJuly2008,andJuly2008throughJuly2013.59Tobesure,ifoneadjuststheperiodofcomparison,thisconclusioncanchange.Forexample,ifonelooksatthesevenyearspriorandfollowingtheJuly2008introductionoftheB.C.carbontax,thenthedifferencebetweenaverageunemploymentratesinB.C.versusCanadaonlydiffersbyatenthofapercentagepoint(andintheotherdirection).60SeetheSustainableProsperity(June2012)studyfortheirclaimthat(todate)theB.C.authoritieshadprovidedatleast$300millioninexcesstaxcutscomparedtothenewrevenuescollectedfromthecarbontax.61Forprovincialincometaxratessee:http://www.taxtips.ca/marginaltaxrates.htm.