– December 30, 2019

In a recent discussion between MIT scientist Andrew McAfee (whose book I much enjoyed) and podcaster, neuroscientist, and New Atheist Sam Harris, the topic of carbon taxing came up. Surprisingly — or perhaps unsurprisingly given the echo chambers of our times — both McAfee and Harris were completely incredulous about the case against a carbon tax. 

To both these clever and highly educated gentlemen, being skeptical of such an obviously benign policy could only be accounted for by being an unscientific climate change denier — or worse, being deep in the pocket of the Trump administration or some callous oil company. 

Smart people unequivocally favor a tax on carbon emissions. To Harris and McAfee, objecting to a carbon tax seemed tantamount to needlessly increasing air pollution, which, Harris argued, only makes sense for people who don’t seem “to care about their lungs.” 

Is the case for carbon taxes really such a no-brainer? Let’s unpack this. 

While the differences between social costs and private benefits that lie at the heart of justifications for taxing carbon may have sound theoretical foundations, there are a lot of troubles as to how we can practically deal with them. Besides, using fossil fuels has so far come with a lot of practical benefits: they’re cheap, convenient, and have a well-established infrastructure. 

The basic case for opposing carbon taxation despite the potential damages from climate change is as follows: Insofar as an effective, working, and biting carbon tax reduces damages from climate change, it does so by reducing our use of fossil fuels. If we were previously using them for good reason — they were the cheapest, most convenient source of energy or they contributed the most to the ease and well-being of our lives — then it follows that an effective carbon tax that made us switch out of fossil fuel would have costly, negative, and material drawbacks. We are made worse off. 

That places us squarely in the economist’s land of weighing benefits against costs — is it worth it? As with the correct age-old observation by physicians that the dose makes the poison, we must similarly ask, “How much?”

The Prima Facie Appeal of Taxing Carbon Emissions

It is not surprising that most economists support some kind of policy that raises the cost of emissions — and among the tools that may accomplish that, relying on the price mechanism is particularly tempting. Economists are devoted students of markets: We usually favor decentralized decision-making mechanisms that allow for the subjective particulars of time and place over a rigid, top-down approach. We support mechanisms that indirectly incorporate externalities — we’re “naturally drawn to the idea of taxing carbon,” as economist David Henderson puts it. He summarizes the case for carbon taxes as follows: 

Burning carbon creates carbon dioxide; increasing the concentration of carbon dioxide in the atmosphere leads to more global warming; more global warming leads to bad consequences in the long run; the majority of people who use carbon don’t take these bad consequences into account when they decide how much carbon to use; therefore they will overuse carbon unless some level of government taxes us for using it.

As economists, we accept the theoretical premise that social costs might exceed private costs — the common idea of an “externality” — as some impact of my coal-burning activity is offloaded onto you, a person entirely external to my coal-purchasing transaction. If so, then the cost of my decision is not fully reflected in the market price I pay. The externality argument is the argument in favor of government intervention that economists most respect

We understand that the politically motivated approach to internalize carbon emissions by mandating technology use is informationally and operationally inefficient, and much prefer the use of the price mechanism to correct for this missing element in the price. Even if an all-knowing government’s mandate to reduce emissions might be more effective (i.e., potent or likely to get the job done), the question of efficiency (whether it’s worth it) remains.

An updated economist’s creed would probably involve the idea that market pricing does a pretty good (depending on your level of public choice cynicism, perhaps even the best available) job of aligning incentives and allocating resources to their most urgently needed uses. As such, using market prices rather than bypassing them is usually a better idea for governments determined to meddle with market outcomes. 

What economists like about a carbon tax is the minimization of efficiency loss. Taxes levied on anything distort market operations — some much less so than others — which is the main reason why some tax increases might be counterproductive and some tax cuts might be self-financing. Levying carbon taxes is comparatively easy and cheap, especially if there is already an excise tax on energy or fuel in place. Those conditions make implementing a carbon tax less costly. 

Two Problems

Provided that what scientists tell us about the impact of greenhouse gas emissions on the planet is accurate — economists are usually not equipped to assess that conclusion — the task of balancing economic needs with environmental harm is an economic (or at worst a political) question rather than a scientific one. While the science of what happens might be “settled” (and no, that does not include the most extremist and alarmist wings of the environmentalist movement), the actions necessary to address that are most certainly not. 

Carbon emissions are not, contrary to what many economists and non-economists seem to believe, approaching the idea of a pure externality; their costs are only partially external to the main transaction. Nor does the simplified presumption of extreme selfishness that economists sometimes play with hold in the real world. 

As economist Bryan Caplan writes on the case for correcting externalities, “most people are not perfectly selfish, and it is usually feasible to charge consumers for a fraction of the benefit they receive” — as we demonstrably do in the case of carbon emissions; fossil fuels, except in countries like Saudi Arabia or the Emirates, usually don’t come cheap. The problem that carbon taxes try to address is one of a mild overproduction of emissions compared to an idealized situation where the social cost of carbon emissions on others could be fully internalized. 

But how could we possibly know where that idealized situation is?

Even accepting the externality argument, we are instantly confronted with two obvious problems: First, we don’t know how far apart these impressive-looking textbook curves of social and private benefit are. There is simply no way to adequately measure the cost of an externality (never mind that costs are individual and subjective rather than collective and observable). If we overcorrect, we are harming ourselves for no good reason.

Second, there are suitable alternatives. The entire process of achieving a well-functioning carbon tax — one that does not suffer from leakage (where polluting industries simply move jurisdictions) and the overshoot that economists worry about or the loopholes and regulatory capture that activists are rightly worried about — is a daunting challenge. In contrast, geoengineers claim to be able to mimic the effects of naturally occurring volcanic eruptions that would block some incoming sunlight with atmospheric particles, a phenomenon that has reduced global temperatures in the past. At a total expense of no more than tens of millions of dollars, a single philanthropist could finance that, bypassing most of the nitty-gritty political horse-trading and the outcomes of opaque negotiation that we worry about. 

A more time-tested and rather low-tech form of geoengineering is planting trees; planting a trillion trees, as suggested by ETH Zürich professor Tom Crowther, would cost a fraction of the price of a carbon tax and have very similar environmental impacts. 

Considering the practical and conceptual difficulties of implementing a carbon tax, as well as the much cheaper alternatives around, the urgency and the no-brainer status that a carbon tax policy seems to have are much less pronounced.

Even though I generally agree with McAfee and Harris on the merits of a carbon tax, the negligence and echo chamber tendency displayed were baffling to me. Carbon emissions are much less external than most people think, and there are numerous options that might achieve similar climate change mitigation at much lower costs. The case for taxing carbon is not as clear as these erudite gentlemen seem to think. 

Joakim Book

Joakim Book

Joakim Book is a writer, researcher and editor on all things money, finance and financial history. He holds a masters degree from the University of Oxford and has been a visiting scholar at the American Institute for Economic Research in 2018 and 2019. His work has been featured in the Financial Times, FT Alphaville, Neue Zürcher Zeitung, Svenska Dagbladet, Zero Hedge, The Property Chronicle and many other outlets. He is a regular contributor and co-founder of the Swedish liberty site Cospaia.se, and a frequent writer at CapXNotesOnLiberty, and HumanProgress.org.

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