The definition of insanity, according to a famous quotation (often mis-attributed to Albert Einstein) is “doing the same thing over and over and expecting different results.” I often think of that quote when I read yet another statement by noted economists touting a carbon tax as the solution to global climate change. Full disclosure: I have made that same argument myself as have many of my TPC colleagues.
The many tax incentives for renewable energy that Congress has enacted in recent years also are inadequate to the task. In contrast, as Ezra Klein argues in a recent New York Times column, “the only way for humanity to both address climate change and poverty is to invent our way to clean energy that is plentiful and cheap and then spend enough to rapidly deploy it.”
First, the politics. Voters and their elected representatives have consistently rejected carbon taxes as well as the alternative approach to carbon pricing, cap-and-trade. Voters in Washington State, one of the most liberal states in the US, twice rejected carbon tax initiatives – one initiative that would have used the revenues to pay for cuts in other taxes and the other one that would have invested them in clean energy projects.
The US House of Representatives did pass a cap-and trade bill in 2009, but the bill died in the Senate. And in the past decade, Congress has shown no interest in passing such a measure. Last week, there was some discussion of using a carbon tax to replace income tax increases as a way of financing the reconciliation bill, but that remains a very steep hill to climb.
But political feasibility in the US is not even the main problem with the carbon tax. The bigger issue: Greenhouse gas emissions are a global problem that cannot be solved by curbing polluting activities only in the United States. In 2019, the latest pre-pandemic year, the US accounted for only about 11 percent of global greenhouse gas emissions, far below China’s 27 percent. Even if the US cut its emissions in half, world emissions would only fall by about 5 percent – a decline that would be more than offset by continued growth in emerging economies.
Carbon taxes also are porous. Producers and consumers can avoid the tax by importing foreign goods with a high carbon content. And lower prices from reduced US carbon consumption could encourage more carbon consumption in other countries.
Border taxes and selective exemptions can minimize these leakages and limit harm to US producers from competition by untaxed producers in other countries. But the issue isn’t only the leakage from the carbon tax itself; it is the amount of global emissions that simply remain outside the range of the tax. And a unilateral tax imposed by the US cannot reduce those foreign emissions.
To be sure, a well-designed US carbon tax or a cap-and-trade system could reduce US emissions and increase economic efficiency. And either probably is more cost-effective than regulations or subsidies for existing renewable energy technologies. A well-designed carbon tax could also spur private innovation in renewable energy. And carbon pricing can reduce harm from air pollution within the United States, although the design of a tax aimed at addressing that problem would differ from the design of an ideal carbon tax.
But even with those benefits, a carbon tax still would not be sufficient to address the global warming crisis at any reasonable cost to the US economy.
The only real solution is similar to what will get us past the COVID-19 pandemic – public support for the development and deployment of new technologies. It will take global vaccination efforts and possibly other new treatments, not unsustainable lockdowns, to tame the pandemic. In a similar manner, we need the clean energy equivalent of the “warp-speed” vaccine effort if we are eventually to limit the damage from global climate change. The ultimate solution is lower prices for clean energy, not higher prices for energy from fossil fuels, even though the latter may be helpful at the margin for lowering prices of clean energy.
Advocating research into new technologies as a solution may seem like the economist fantasy of “assuming a can opener.” But renewable energy is no longer just a hobby horse of “tree-huggers.” The costs of renewable energy have fallen dramatically in recent years and new Investments to drive these costs down further will make clean energy competitive even without carbon pricing. And, unlike higher prices for US consumers, lower costs of alternative energy will encourage their adoption everywhere. It is only through these global effects that we can truly begin to reduce the damage from greenhouse gas emissions.
