The following is a letter from AEI visiting scholar Ben Zycher to Sen. Sheldon Whitehouse, D-R.I., Rep. Henry Waxman, D-Calif., Rep. Earl Blumenauer, D-OR., and Sen. Brian Schatz, D-HI, of the Bicameral Task Force on Climate Change in response to their April 3, 2013, request for comments and observations on the draft legislation and supporting materials for imposition of a carbon pollution fee upon large emitters.
April 12, 2013
Honorable Henry A. Waxman
2204 Rayburn House Office Building
Washington, DC 20515
Honorable Sheldon Whitehouse
717 Hart Senate Office Building
Washington, DC 20510
Honorable Earl Blumenauer
1111 Longworth House Office Building
Washington, DC 20515
Honorable Brian Schatz
722 Hart Senate Office Building
Washington, DC 20510
Dear Congressman Waxman, Senator Whitehouse, Congressman Blumenauer and Senator Schatz,
I write in response to your request of April 3 for comments and observations on the policy discussion and draft legislation for imposition of a "carbon pollution fee" (tax) upon "large emitters." Thank you for your inquiry and for the opportunity to offer my views as part of a common effort to develop public policies yielding both stronger economic growth and environmental improvement. Please note that the ideas offered here are mine alone and should not be interpreted as those of the American Enterprise Institute.
I begin with six central observations, each of which then is discussed in turn. I offer a summary paragraph at the end.
- Neither the proposed legislation nor the ancillary materials offer an empirical estimate or even a qualitative assertion about the environmental benefits to be yielded by the proposed tax.
- The proposed tax is inconsistent with the principles of efficient taxation.
- The proposed annual percentage increase in the tax is inconsistent with its stated goal.
- Some of the factual assertions underlying the proposal appear to be incorrect.
- The evidence in support of the underlying "carbon pollution" framework is far weaker than commonly assumed.
The proposal would separate political responsibility for a large tax increase from the political benefits of a large wealth transfer.
I. Neither the proposed legislation nor the ancillary materials offer an empirical estimate or even a qualitative assertion about the environmental benefits to be yielded by the proposed tax. Nor is there a summary or a reference to peer-reviewed estimates of the future temperature effects and attendant future weather/climate reactions that purportedly will result from current and prospective increases in greenhouse gas (GHG) concentrations, whether from U.S. or foreign sources.
If we apply the widely-accepted MAGICC model developed by Dr. Tom Wigley at the National Center for Atmospheric Research, and assume the United Nations Intergovernmental Panel on Climate Change (IPCC) midrange emissions path (A1B), an immediate reduction in U.S. emissions by half would yield a reduction in global temperatures of 0.1 degrees Celsius 100 years from now. Because annual temperature variability is greater than that figure, the predicted effect could not be measured reliably. Note that a 50 percent reduction in U.S. emissions could be achieved only in the face of massive economic dislocation. A somewhat cruder approach might be to use the IPCC "likely" range of 2 degrees to 4.5 degrees Celsius for the temperature effect by the year 2100 of a doubling of carbon dioxide concentrations, "with a best estimate" of about 3 degrees. (As an aside, a growing body of peer-reviewed literature suggests that this range and best estimate are too high.) U.S. emissions of GHG are about 17 percent of global GHG emissions---a proportion that is declining steadily---suggesting that the U.S. would contribute about 0.5 degrees of the IPCC best estimate of 3 degrees. Suppose that U.S. policies---an example is the proposed "carbon" tax---reduce our contribution by half. In that case, the reduction in the U.S. contribution would be about 0.2-0.3 degrees, a change that no climate model predicts would yield measurable effects in terms of climate patterns and attendant impacts upon weather and other parameters.
At a minimum, proposals for a large new tax justified as a corrective for purported environmental externalities ought to offer a credible estimate of the benefits to be derived. If there are no measureable benefits, then there is no justification for the tax. A further summary discussion of the evidence is presented below in section V.
II. The proposed tax is inconsistent with the principles of efficient taxation. Taxes analytically are prices for public services, which in principle display the classic characteristics of collective goods: non-competition in consumption and non-excludability of nonpayers. Accordingly, "efficient" taxes, in principle, should be
imposed in proportion to the benefits derived from (or the demands for) the provision of public services. Is there a good reason to believe that the incidence (economic burden) of the proposed carbon tax would be a good proxy for the distribution of the benefits of public services? The proposal offers no grounds for an expectation of such tax "efficiency." Indeed, the reverse is true: If the revenues are to be distributed to "the American people," that is, to the constituencies favored by the authors of the proposal, then the tax by definition will not be imposed in accordance with the benefit principle.
Furthermore, because the tax would be imposed formally upon industrial facilities and fuel suppliers, with the price effects hidden in market price movements, the tax would create (or exacerbate) the standard fiscal illusion problem: It would obscure rather than clarify the cost of government, an outcome inconsistent with efficiency in tax policy because the pursuit of efficiency---the equation of the marginal benefits and costs of public spending---requires that voters be confronted with the true cost of public policies. The proponents of the carbon tax cannot dispute this point because their central justification for the tax is the purported failure of market prices to reflect the true social costs imposed by the GHG "externality." The same principle properly applies to the public sector.
Even in terms of the standard Pigouvian approach for efficient taxation of activities creating externalities, the proposed tax is likely to prove inefficient. Apart from the disproportionate effect across sectors (discussed below), the tax would raise the overall price level, that is, it would make the economy smaller in real terms unless we accept the underlying premise that it would mitigate an important environmental externality. As noted above, that premise almost certainly is not correct in this case. If indeed the revenues simply are redistributed to "the American people"---again, the constituencies favored by the proponents of the tax---then the economy would be smaller in the long run by the marginal excess burden created by the tax. (Since such redistribution provides incentives for individuals and groups to pursue government largesse and to protect themselves from efforts to force them to finance transfers to others, redistribution also wastes resources in enhanced political competition, that is, rent-seeking and rent-defending. This issue is not developed further here.) Apart from the short run structural economic shifts (and unemployment) created by the tax---higher energy costs would affect different sectors disproportionately---the correlations among percent changes in energy consumption, GDP growth, and civilian employment growth are strong, as illustrated in the data for 1970-2011 displayed in the following figure.
The simple correlations among the annual percent changes are:
Energy consumption/GDP: 0.764
Energy consumption/employment: 0.669
Correlations are not evidence of causation; but the correlations are sufficiently high to make it reasonable to hypothesize that an artificial increase in energy costs would impose a long-term reduction in the size of the U.S. economy. There is no evidence in the draft legislation or in the accompanying materials that the proponents of the tax have considered this factor.
III. The proposed annual percentage increase in the tax is inconsistent with its stated goal. Regardless of the differing specifics of the various general circulation models (GCMs), and regardless of the different underlying assumptions about feedback effects and the like, there is no dispute that the temperature impact of rising GHG concentrations is not linear (or constant); instead it is logarithmic, that is, the marginal effects decline as GHG concentrations rise. Accordingly, any annual increase in the tax should decline as GHG concentrations rise, if we assume that the net effects of rising GHG concentrations will be both adverse and nontrivial. Since the U.S. tax would not affect GHG emissions overseas, it is realistic to assume that GHG concentrations in fact will continue to rise, a reality highlighted by the failure of the United Nations Framework Convention on Climate Change. Therefore, if internalization of adverse "pollution" effects is the goal---the proponents of the tax seem to have in the backs of their minds a Pigouvian externality tax, however misguided in this context---a constant increase in the tax would not be efficient economically regardless (or, perhaps, because) of the "polluter pays" rhetoric used to justify this proposal. More broadly, the standard externality (or efficient Pigouvian tax) argument does not apply because even a radical reduction in U.S. emissions of GHG would have little or no effect on global temperatures even under the most alarming predictions of the IPCC GCMs. An externality tax that yields no environmental (or other) benefits cannot be efficient.
IV. Some of the factual assertions underlying the proposal appear to be incorrect. The supporting materials list several GHG sources and percentages of total GHG emissions as follows: carbon dioxide emissions unrelated to fossil fuel combustion (5 percent), methane from various sources (8.4 percent), nitrous oxide from various sources (5 percent), and fluorinated gases of various types (2.2 percent). The respective percentages reported by the Energy Information Administration are: 1.3 percent, 11.1 percent, 3.3 percent, and 2.7 percent. Perhaps federal agencies have arrived at differing estimates, although in that case it is not clear why confidence in policymaking would be justified given such disagreement about the basic facts. These differences are not mere nitpicking: Once a Pigouvian framework is used as a justification for a tax, the efficiency of the latter depends crucially upon assumptions about the importance of different types of GHG emissions in terms of the purported externality. Moreover, the various GHG components have very different radiative (warming) effects, even if we ignore such other crucial factors as feedback effects, and it is far from clear that the administration of the proposed tax would incorporate those differences correctly. The EIA in its estimation methodology attempts to circumvent this problem by computing carbon dioxide equivalents based upon IPCC estimates well over a decade old of 100-year global warming potentials. Suffice it to say that the science has moved substantially since 2001, notwithstanding large continuing debates over cloud reactions and other crucial parameters.
V. The evidence in support of the underlying "carbon pollution" framework is far weaker than commonly assumed. Since future temperatures (and ancillary climate effects) are unknown, the "carbon pollution" approach must be based upon predictions made by some of the GCMs used by IPCC; but the models have not been shown to predict, for example, the warming around a millennium ago, the Little Ice Age, the warming around the middle of the 19th century, the cooling from about 1940-1980, the subsequent warming through about 1998, and then the absence of a trend over the last fifteen or so years. All climate models predict that anthropogenic warming would create an enhanced heating effect in the tropical mid-troposphere; but neither the satellites nor the weather balloons can find it, a reality that creates serious questions about the usefulness of the models for policy formulation. In simpler terms, the IPCC GCMs can predict neither the past nor the present; it is not clear why policymakers should have strong faith in their predictions about the future, particularly over many decades.
Reliance on some of the GCMs has proven necessary because the actual evidence in support of the "carbon pollution" approach is weak. As of this coming June 1 (the outset of the Atlantic hurricane season), it will have been over seven and a half years since a Category 3 or higher hurricane landed on the U.S. coast; that long a period devoid of an intense hurricane landfall has not been observed since 1900. A widely accepted and documented measure of tropical cyclone energy (the ACE index) is near its lowest level since reliable measurements began by satellite in the 1970s. An increase in such hurricane activity in coming decades is far more likely to reflect a reversion toward the mean rather than the effects of GHG concentrations. With respect to sea level increases, the evidence from the last century is that there is substantial variation across decades in the rate of increase, without a long-term trend despite rising atmospheric concentrations of GHG. The Palmer Drought Severity Index shows no trend over the record period beginning in 1895 in terms of drought; more areas in the U.S. have experienced an increase in soil moisture than a decline. More generally, the peer- reviewed literature suggests that adaptation to changing climate conditions is far less costly than commonly assumed.
The effects of rising atmospheric concentrations of carbon dioxide are far from obvious. Atmospheric carbon dioxide concentrations for most of the period during which there has been life on earth have been substantially greater than is the case currently. In the short term, carbon dioxide is nontoxic to humans even at concentrations many times higher than current ambient levels. Moreover, increasing concentrations of carbon dioxide may yield some important health and environmental benefits, in part by protecting plants from such environmental stresses as drought, ozone, and ultraviolet B radiation. At the same time, a delineation of the possible benefits of higher carbon dioxide concentrations answers the wrong question; the right question concerns the net present value of the streams of benefits and costs when a world with a capital stock loosely optimized for cooler temperatures is confronted, hypothetically, with warmer ones. The proposal and related materials offer no such analysis.
VI. The proposal would separate political responsibility for a large tax increase from the political benefits of a large wealth transfer. The proposal applauds the fact that "roughly 7,000 facilities would pay [the] fee." This is justified on the grounds of administrative convenience relative to an alternative in which the tax would be imposed on commercial establishments, retail outlets, or households. This purported administrative efficiency is asserted rather than demonstrated---after all, gasoline taxes, for example, are collected at the point of sale---but what is clear is that the tax would be shifted forward onto consumers across the economy, in proportions driven by demand and supply conditions (that is, demand and supply elasticities) in various economic sectors. Therefore, the tax would be hidden in prices rising disproportionately across markets, with private producers receiving some substantial part of the political blame for that outcome.
Since the revenues are to be returned to "the American people"---again, the constituencies favored by the proponents of the tax---wealth redistribution is an outcome more likely than environmental improvement, particularly given the reality that even a large reduction in U.S. GHG emissions would have a minor effect on global GHG concentrations. In this context, a tax rising automatically at a constant rate is a tool both effective and attractive to policymakers interested in increased spending without having to vote explicitly for higher taxes. It also would be highly effective from the viewpoint of the beneficiaries of the tax/transfer system.
I have not examined the complex regional implications of a carbon tax/revenue transfer proposal, but it would be very surprising to find no net wealth transfer effects geographically. This is an important issue worthy of future analytic effort. But whatever the advertised use of the tax revenues, only under highly restrictive arrangements would the formal earmarking of the funds represent the actual net budget effect of the tax. Under a far broader set of conditions, the tax simply would expand the size of the federal sector, with marginal budget choices driven by Congressional bargaining and by the implicit wealth effect (for the federal government) of a new revenue source used to subsidize constituencies not bearing (or not perceiving) the burden of the tax. Under most conditions, Congress can change the allocation of federal budget dollars in ways frustrating the advertised use of the revenues. The implicit premise that a larger federal sector would yield improved "efficiency" is far from obviously correct.
No persuasive justification for the proposed "carbon pollution" fee (tax) is delineated in the draft legislation or the supporting materials. The effect of such a tax on global climate conditions, regardless of one's beliefs about the underlying climatology, would be trivial; a tax imposed to correct for a purported environmental externality that does little or nothing to do so cannot be efficient. The proposed tax is inconsistent with the principles of efficient taxation, and the proposed automatic annual increase in the tax is inconsistent with the underlying climatology. The factual basis of the proposal is problematic, and more generally the evidence in support of the underlying "carbon pollution" framework is weak. The proposed tax also would separate political responsibility for taxation from the political benefits of the wealth transfers to be financed. Congress would be wise to reject this policy tool.
Thank you again for the opportunity to offer my views and analytic perspective. I look forward to a continuing exchange of ideas.
 See the IPCC discussion at http://www.ipcc-data.org/ddc_co2.html.
 See Intergovernmental Panel on Climate Change, "Climate Change 2007: Synthesis Report," p. 38, at http://www.ipcc.ch/pdf/assessment-report/ar4/syr/ar4_syr.pdf.
 For a chart summarizing the findings in the peer-reviewed literature since 2010, see http://www.masterresource.org/2013/02/lukewarmers-2012-edition/, at Figure 3. See also J.C. Hargreaves, et. al., "Can the Last Glacial Maximum Constrain Climate Sensitivity?" Geophysical Research Letters, Vol. 39, Issue 24, (December 2012), at http://onlinelibrary.wiley.com/doi/10.1029/2012GL053872/pdf.
 See the emissions estimates published by the Energy Information Administration at http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=90&pid=44&aid=8. An estimate of about 19 percent for 2008 has been published by the World Resources Institute at http://www.wri.org/tools/cait/?guest=1.
 See Tyler Cowen, "Public Goods," in David R. Henderson, ed., The Concise Encyclopedia of Economics, Indianapolis: Liberty Fund, 2008, at http://www.econlib.org/library/Enc/PublicGoods.html.
 In such an efficient tax system, tax prices are equated to taxpayers' respective marginal valuations of the collective goods being provided, and the sum of the tax prices equals the marginal cost of providing the good. Income, wealth, and consumption are examples of proxies for those demands. See Geoffrey Brennan and James M. Buchanan, The Power to Tax: Analytic Foundations of a Fiscal Constitution, Cambridge: Cambridge University Press, 2006, pp. 83-108. See also James M. Buchanan, Public Finance in Democratic Process, Chapel Hill: University of North Carolina Press, 1967, pp. 34-76.
 See James M. Buchanan, "The Fiscal Illusion," reprinted by the Library of Economics and Liberty at http://www.econlib.org/library/Buchanan/buchCv4c10.html.
 A "Pigouvian" tax imposed upon activities creating negative external effects may be efficient in principle if the costs of those activities are not reflected in market prices. The tax would be equal to the marginal social cost of the externality, so that market prices including the tax would reflect the true social cost of given production or consumption choices. See Bryan Caplan, "Externalities," in David R. Henderson, ed., The Concise Encyclopedia of Economics, Indianapolis: Liberty Fund, 2008, at http://www.econlib.org/library/Enc/Externalities.html. See also Ronald Coase, "The Problem of Social Cost," Journal of Law and Economics, Vol. 3 (October 1960), pp. 1-44; and William J. Baumol, "On Taxation and the Control of Externalities," American Economic Review, Vol. 62, No. 3 (June 1972), pp. 307-322.
 Sources, respectively: Energy Information Administration at http://www.eia.gov/totalenergy/data/annual/index.cfm#consumption, Table 2.1a; Bureau of Economic Analysis at http://bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=1&isuri=1, Table 1.1.1; and the Council of Economic Advisers at http://www.gpo.gov/fdsys/browse/collection.action;jsessionid=phsQRlrRhT611xsb4y8Zwb5yfFgZRpLKqk8ZC5SrTmr1CmwvxJl2!-1083576818!-1346156940?collectionCode=ERP&browsePath=2013&isCollapsed=false&leafLevelBrowse=false&isDocumentResults=true&ycord=0, Table B-36.
 The relationships among energy policies, energy use, real GDP growth, and employment are the subject of an ongoing research project at the American Enterprise Institute.
 Indeed, to the degree that the tax drives industrial and other investment overseas, the net effect on GHG concentrations would prove even smaller. For a summary of the UNFCCC, see http://www.un.org/wcm/content/site/climatechange/pages/gateway/the-negotiations.
 Note however, that as the worldwide employment of horizontal drilling and modern hydraulic fracturing technologies increases, the substitution of natural gas in place of other fossil fuels may reduce the growth of GHG concentrations. This would result in a reduced rate of warming.
 See the summary data reported by the EIA at http://www.eia.gov/energyexplained/index.cfm?page=environment_where_ghg_come_from.
 With respect to the most recent period, see the NASA data at http://data.giss.nasa.gov/gistemp/tabledata_v3/GLB.Ts.txt; the NOAA data at http://www.ncdc.noaa.gov/cmb-faq/anomalies.php; and the Met Office (UK) data at http://www.metoffice.gov.uk/hadobs/hadcrut4/data/current/download.html#regional_series.
 Other models predict that anthropogenic warming would yield a slight cooling in the stratosphere. There is some satellite evidence of that; but those models also predict that most of the warming will be observed in the coldest and driest air masses in the winter. Would that effect justify a large new tax?
 See, e.g., Ryan N. Maue, “Recent Historically Low Global Tropical Cyclone Activity,” Geophysical Research Letters, Vol. 38, Issue 14 (July 2011), at http://onlinelibrary.wiley.com/doi/10.1029/2011GL047711/abstract.
 See, e.g., S.J. Holgate, “On the Decadal Rates of Sea Level Change During the Twentieth Century,” Geophysical Research Letters, Vol. 34 (2007), at http://www.joelschwartz.com/pdfs/Holgate.pdf.
 See, e.g., Konstantinos M. Andreadis and Dennis P. Lettenmaier, “Trends in 20th Century Drought Over the Continental United States,” Geophysical Research Letters, Vol. 33, Issue 10 (May 2006), at http://onlinelibrary.wiley.com/doi/10.1029/2006GL025711/abstract.
 A detailed summary of this literature is presented by Patrick J. Michaels, et. al., Addendum: Global Climate Change Impacts in the United States, Center for the Study of Public Science and Public Policy, Cato Institute, October 2012, at http://www.climatesciencewatch.org/wp-content/uploads/2012/10/Cato-climate-impact-assessment-june2012draft-smaller.pdf.
 For a summary discussion, see, e.g., "The Many Benefits of Atmospheric CO2 Enrichment," Science and Public Policy Institute, February 2011, at http://www.co2science.org/education/book/2011/55BenefitsofCO2Pamphlet.pdf.