By Institute for Energy Research ——Bio and Archives--March 23, 2013
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The most significant long-term pollution challenge facing America and the world is the anthropogenic emissions of greenhouse gases. The scientific consensus, as reflected in the 2009 assessment by the U.S. Global Change Research Program (USGCRP) on behalf of the National Science and Technology Council, is that anthropogenic emissions of greenhouse gases are causing changes in the climate that include rising average national and global temperatures, warming oceans, rising average sea levels, more extreme heat waves and storms, and extinctions of species and loss of biodiversity. A multitude of other impacts have been observed in every region of the country and virtually all economic sectors.
From an economist’s perspective, greenhouse gas emissions impose costs on others who are not involved in the transaction resulting in the emissions; that is, greenhouse gas emissions generate a negative externality. Appropriate policies to address this negative externality would internalize the externality, so that the price of emissions reflects their true cost, or would seek technological solutions that would similarly reduce the externality. Such policies encourage energy efficiency and clean energy production.Later on, we see estimates of the size of this “negative externality”:
In 2010, a Federal interagency working group…produced a white paper that outlined a methodology for estimating the SCC [social cost of carbon] and provided numeric estimates (White House 2010). The SCC calculation estimates the cost of a small, or marginal, increase in global emissions. This process was the first Federal Government effort to consistently calculate the social benefits of reducing CO2 emissions for use in policy assessment… To estimate the SCC, the working group used three different peer-reviewed models from the academic literature of the economic costs of climate change and tackled some key issues in computing those costs. One issue is the choice of the discount rate used to compute the present value of future costs: because many of the costs occur in the distant future, the SCC is sensitive to the weight placed on the welfare of future generations… The working group report provided four values for the social cost of emitting a ton of CO2 in 2011: $5, $22, $36, and $67, in 2007 dollars. The first three estimates, which average the cost of carbon across various models and scenarios, differ depending on the rate at which future costs and benefits are discounted (5, 3, and 2.5 percent, respectively). The fourth value, $67, comes from focusing on the worst 5 percent of modeled outcomes, discounted at 3 percent. All four values rise over time because the marginal damages increase as atmospheric CO2 concentrations rise. [Bold added.]In the first place, it is rather dubious to present an estimate of the “social cost of carbon” that ranges from $5 to $67, a range that varies by a factor of thirteen. Furthermore, the reasons for the wide range are also disconcerting: The higher values are generated by picking very low “discount rates” and/or by focusing on “the worst 5 percent of modeled outcomes.” If we pick a reasonable discount rate of 5 percent, and take the average of all modeled outcomes (rather than focusing just on the “worst 5 percent” of possible outcomes), then the Administration’s own working group computed a social cost of carbon (in 2011) of a mere $5 per ton. This is hardly consistent with the claims of the urgency for immediate action. Even here, it’s not simply that the Administration’s analysis has to rely on low discount rates and worst-case-scenario thinking: they are ignoring a huge factor in the peer-reviewed economics literature. Namely, they are ignoring the “tax interaction effect,” which shows how a naïve setting of tax rates based on the “social cost of carbon” can lead to large economic losses. The problem is that the U.S. already has an inefficient tax code, and so adding a carbon tax on top of it will exacerbate the inefficiency, even if the carbon tax made sense from a textbook “negative externality” approach. I spell out the full details in this article, but for our purposes consider this table based on the work of pioneers in this area of research: What the table above shows is that even with a “social cost of carbon” of, say, $50/ton, the optimal carbon tax would be zero if the revenues were distributed back to citizens in a way that didn’t reduce their other tax burdens. Even if the carbon tax were used to reduce the personal income tax dollar-for-dollar (which will never happen in the actual political realities of such a tax), the optimal tax would only be $27/ton, which cuts the textbook remedy almost in half. Thus we see that even using the cutting edge, peer-reviewed research, the Administration’s arguments for imposing a carbon tax calibrated to the “social cost of carbon” do not work.
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The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.