In the most recent issue of National Affairs, Oren Cass argues that a U.S. carbon tax would fail to deliver any of the benefits that carbon tax supporters rely on to justify it: substantially reducing greenhouse gas emissions, fostering an international climate agreement, spurring technological innovation, replacing inefficient regulations and subsidies, and providing a useful new stream of revenue for offsetting tax reductions. In so doing, Cass rejects the idea that market actors—responding to market signals—are up to the task of emissions mitigation. We do not believe he proves his case.
Reducing U.S. Emissions
Cass opens by claiming that a carbon tax “would not, at the levels contemplated, come close to achieving America’s own targeted reductions” because “[t]he models for tax proposals frequently indicate reductions in the range of 15% to 30% by 2050, as compared to the official 80% target or the more moderate 50% goal sometimes advanced by researchers.”
We do not know where this “official 80% target” for emission reductions by 2050 comes from; if there is such an “official target,” it is news to us. Cass is certainly correct that a federal carbon tax starting in the oft-cited $15-25 range will not get 80% reductions by 2050 (pending more and better modeling, we’re agnostic on even 50%). But in the very next sentence, Cass completely changes metrics: “Indeed, carbon-tax proponents tend not to link their proposals to any estimate of reduced warming, because the reductions amount to rounding errors.”
Carbon tax proponents (such as ourselves) 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, and as far as we know no carbon tax advocate claims otherwise. As we have previously written, a U.S. carbon tax is necessary, but most definitely not sufficient, for a global climate agreement that would result in reduced warming.
“One might think this prima facie failure would represent a fatal flaw,” says Cass, “but such naïveté only flags one as an easy mark; the shells are just beginning their delicate dance.” The only prima facie conclusion we draw from this is that it is really easy to win an argument when you get to invent the other side’s position.
Fostering an international agreement
Cass next addresses prospects for international action, which he finds unpromising whether or not the U.S. acts unilaterally. But he ignores the fact that many countries, including the U.S., are already acting, and carbon pricing schemes are getting a surprising amount of attention and support. The issue is not “unilateral action or no unilateral action?” The issue is, what sort of action will nations undertake? There is good reason to think that an international agreement on carbon taxes would prove easier to adopt than alternative mitigation strategies.
Nor does Cass seem to understand what’s going on in the present climate negotiations. He writes, for instance, that “conceding in advance and then arriving at the table without any bargaining chips is a very poor negotiating strategy.”
Let’s first assume, as Cass does, that a carbon tax is a “concession.” Cass completely ignores the fact that the United States has a whole slew of bargaining chips—and of far greater value to most of the other parties—beyond a U.S. carbon tax: the Green Climate Fund, technology transfer provisions, offset markets, etc. These are all more valuable to developing countries simply because they are immediate, tangible, and have inherent monetary worth.
But that is just the start. In labeling a U.S. carbon tax as “a concession,” Cass ignores the fact that it is not a concession at all, but a very big stick as far as any country that exports carbon-intensive goods to the United States. Any U.S. carbon tax would likely include a “border adjustment” whereby a levy would be placed on imports based on their carbon content/domestic carbon price (Every proposed tax includes this, although designing and implementing such an adjustment that accurately accounts for carbon content and is WTO-compliant will be a very difficult and complex task). If, say, your steel exports to the United States are subject here to such a border adjustment, then you have to decide whether you want that tax revenue to go to the U.S. Treasury or to your own. What Cass calls a U.S. “concession” is in fact a very powerful incentive for other countries to adopt their own equivalent domestic carbon tax.
Finally, we note that Cass also offers no ideas of his own on how otherwise to get everyone (or anyone) to the table.
“If one truly believed a domestic carbon tax could serve as an instrument for fostering a global deal,” Cass argues, “its implementation should be suspended pending execution of a deal that met the desired parameters.” True . . . if there were not good reasons for the U.S. to adopt a carbon tax regardless of international agreement. As discussed below, that’s because it is a more efficient and less costly policy tool than the current combination of regulation and subsidies.
Spurring technological innovation
Cass is skeptical that carbon taxes will lead to technological breakthroughs. He grounds his argument on the European experience of “gas prices typically at least $4 higher than U.S. prices . . . the equivalent of a carbon tax on the order of $400 per ton of CO2,” and “electricity costs up to more than double U.S. rates, the equivalent of a carbon tax of more than $200 per ton.” Despite these “large price signals,” he flatly states that “innovation has not been forthcoming and it is unclear why more of the same signals in the American market would change the dynamic.”
Carbon tax advocates agree that a carbon tax in the range discussed in the United States would not change investment decisions very much. With the average price for a new car in the U.S. more than $33,000, a carbon tax does not send a price signal to car buyers: a $20 carbon tax yields a 20 cent increase in the price of a gallon of gasoline (plus over the short-term the demand for gasoline is highly inelastic). That common ground aside, he is dead wrong about the effect of European price signals. The average U.S. 2014 model year light-duty vehicle emits 229 g/km (367 g/mi). The average EU model year 2014 light-duty vehicle emits 123 g/km. That’s 46% lower. So, the truth is that at the much higher European level, a price signal does get through and does lead to innovation or, more accurately, customer demand that drives innovation.
Cass fares even worse when we look at electricity. In April 2015, the average U.S. retail price for electricity (across all sectors) was $0.10/kWh, and 8% of U.S. power came from renewables. In 2014, the most expensive power in Europe was in Denmark and Germany: $0.34 (0.3 euros)/kWh. That is more than triple the U.S. price, which Cass certainly would call a “large price signal.” In 2014, Denmark got 39% of its power from wind alone, five times the share of all U.S. renewables combined. One can argue that Denmark is a special case, so let’s try Germany: in 2014, 26% of its power came from renewables, more than three times the renewables share of the U.S. market.
The upshot is that European price signals do produce significant changes in market behavior and it is odd that a conservative like Cass would find this surprising. Whether a U.S. carbon tax would produce these sorts of price signals would, of course, depend on its size.
Replacing regulations and subsidies
Few economists—whether they be of the Left or the Right—would disagree that carbon pricing is the most efficient means of reducing greenhouse gas emissions relative to the alternatives. Cass, however, disagrees. A carbon tax, he says,
is not the least-worst option, particularly for spurring the innovation that might actually reduce emissions worldwide. Accepting inevitable regulation does not entitle one to choose a single regulatory response. And accepting ineffective regulation as inevitable is neither the right political decision nor one supported by the evidence from current political battles.
Well, if a carbon tax will not spur innovation, what would? Cass’s answer is “a well-designed program [that] would support a nascent technology as it pursued commercialization and scale but phase out as it matured, to ensure that producers remained focused on a cheaper-than-carbon endgame.” That sounds exactly like the rhetoric (and the reality) of U.S. renewable energy policy for the last 30 years, and the phase-out has yet to happen. Beyond that we are left to guess.
Moreover, what does “Accepting inevitable regulation does not entitle one to choose a single regulatory response” mean? We have no idea.
Finally, consider Cass’s argument that “accepting ineffective regulation as inevitable is neither the right political decision nor one supported by the evidence from current political battles.” The Clean Air Act says that EPA “shall” regulate pollutants that “are reasonably anticipated to endanger health or welfare” (and the Act’s definition of “welfare” includes “effects on weather and climate”). Thus our question: what color is the sky on the planet where the Supreme Court did not decide in Massachusetts v. EPA that CO2 is a “pollutant,” and EPA did not then make its endangerment finding? Barring Congressional action, federal regulation is not a matter of choice.
Cass questions whether a carbon tax could ever be efficient by noting the challenges of identifying the “right” tax level. In so doing, he criticizes the Social Cost of Carbon as the result of modeling that is “not much better than a guess,” and thus concludes that a carbon tax is a bad idea because “today’s carbon-tax proposals, based roughly on the SCC estimates, do not produce emissions reductions commensurate with the goal of avoiding catastrophe.”
Cass apparently does not realize that—precisely because it is such a wild guess—it is the rare carbon tax proposal that sets its rate at the SCC. More often, proposed rates are based on either (a) what is considered politically acceptable, or (b) what would result in a specific level of emissions reductions (or some combination of the two). But in any event, a U.S. tax—whatever the rate—would certainly be more likely to lead to the necessary international agreement than no tax at all.
Finally, Cass argues that a carbon tax is unsuitable as a revenue stream because it “is a highly distortionary consumption tax whose burden skews heavily toward the rural, the industrial, and the poor for the benefit of wealthy, urban symbol manipulators.”
Every carbon tax proposal out there, however—regardless of where on the political spectrum it comes from—proposes to spend a significant portion of the revenue to hold harmless those who are disproportionately affected.
Cass goes on to argue that if a carbon tax is used as a revenue source, “one needs to tax activities that will not only continue but grow over time despite the tax”; in contrast, a carbon tax would have to turn into a “Ponzi scheme” because “The further emissions fall, the higher rates must go. And because the revenue is equal to the base multiplied by the rate, as the base declines toward zero the rate must increase toward infinity to hold revenue constant.”
But as he himself trumpeted at the very outset, a carbon tax will not reduce emissions “toward zero”; indeed, we agree and would be very impressed if it were to reduce U.S. emissions by 50% over the next 35 years. If a carbon tax yields a rapidly-diminishing source of revenue as Cass fears, then by definition it has done its primary job of significantly reducing greenhouse gas emissions (something Cass has elsewhere said would not happen) and thus facilitating an international agreement.
Oren Cass’s essay suggests that, for some conservatives, there is nothing—absolutely nothing—they hate worse than taxes. But—whether or not you agree that we should curtail them—since the law requires us to do so, how would conservatives prefer to go about it? If Cass’s essay is any indication, the answer apparently is, “by doing more of the same.” Unfortunately, we all agree that that is not a good plan.