If "thought leaders" don't put much thought into their analysis, the analysis is worse than useless.
That is the case with this terrible piece of "analysis" from Benjamin Zycher of American Enterprise Institute that came out this morning. He takes a look at whether a U.S. carbon tax could be "efficient" in the economic sense -- that is, if it would net out to being positive economically. When I'd heard recently that the AEI was starting to look at and talk again about carbon tax policies, I'd been encouraged to hear it, so I eagerly read the column as soon as I saw it this morning (thanks to Coral Davenport for tweeting it out). Unfortunately, Zycher appears to have approached this "analysis" with such a bias as to ignore some basic logic and obvious facts when concluding that a carbon tax is unlikely to be efficient.
First of all, when the column starts its second paragraph with, "Let us shunt aside the very real continuing questions of the underlying climate science," the jig is up. This continuing allusion to there being any uncertainty about the very real emerging damages of very evident ongoing and accelerating climate change is such a condemnable canard that I won't even go into it here. But at this point, the only "real continuing questions" are about how bad it's going to get, and how quickly. Not basic questions of whether carbon dioxide drives harmful climate change. So Zycher reveals himself as an evidence-ignoring advocate, not a serious analyst, at least in this unfortunate instance. But let's tear apart his core logic anyway, just for fun.
His core argument boils down to one simple point: since climate change is a global problem with global causes, any one country unilaterally imposing a carbon tax on themselves would be punitive to their economy but inconsequential for avoided damages. It would allow free-riders to gain a trade advantage by avoiding imposing the tax on themselves, without preventing the negative outcomes.
"Any such policies, in order even theoretically to yield measurable effects, must be adopted by a number of nations sufficient to represent a significant proportion of world economic output."
He doesn't define "significant proportion" at all. He just -- without any justification for why this is a threshold -- declares that this means: "A carbon tax, in order to have an actual effect on the purported carbon dioxide externality, must be imposed by all of the OECD countries at a minimum."
Here's the problem.
ALMOST ALL OF THE OECD ALREADY PRICES CARBON, BENJAMIN. Not sure if you got that memo. And perhaps they do it ineffectively versus a more "efficient" policy like an appropriately priced carbon tax. BUT THEY ALREADY PRICE IT. So by your own logic, the U.S. and Canada are the free-riders. Thanks for pointing that out.
Furthermore, since it's completely unclear how he decided that the aggregate economies of the OECD is the necessary threshold, let us examine that for a minute.
The U.S. ranks about sixth in carbon emissions. Yes, if we unilaterally impose a price on carbon on ourselves and no one else does (again, not the actual situation; see above), the economic costs of the policy would be concentrated on the U.S. economy and the economic benefits would be diluted by five-sixths.
But that's not to zero.
Take the following illustration: If your office where you are reading this occupies one out of six floors of a building where everyone shares a common utility bill pro rata, then if you make investments in energy-efficient light bulbs, etc., to reduce the building's electricity bill, you don't see but one-sixth of the cost benefit, and yet you still bought the entire bulb. But this doesn't say there aren't some basic investments that might still make sense to you. So the payback period on an efficient bulb purchase goes from four months to two years if the benefits are diluted? You might still like a two-year payback. A smart economist would.
In short, diluted policy benefits don't completely prohibit any pricing scheme from being valuable at all; it just changes how aggressively you would establish the price and what kinds of investments would make sense in terms of palatable payback.
And of course, as stated above, it's a fairly dumb argument anyway, given that everyone else in the building is already buying efficient light bulbs, and the U.S. is the last to do so. So it makes no sense, logically or factually.
Even more importantly, Zycher must be aware that not every damage-caused economic cost is marginal in a linear fashion. Some dangers are too significant to treat with linear payback analysis, but instead require the consideration of asymmetric risk profiles.
Let's say no one in the building wants to purchase a fire extinguisher system. So if you want to install one, you have to pay for it all yourself. And if the building burns down (and BTW, it's getting hot in your office, and you already periodically smell smoke coming out of the vents), you have no where else to go. I don't know about you, but in that case, I'm twisting everyone's arm to help pay for the fire extinguisher system -- but even if I can't get them to do it, I'm still (bitterly) paying for it myself. Some risks are just too dangerous not to address, especially if the cost of installing the system doesn't really impact my bottom line that dramatically, even without multi-tenant cooperation.
And indeed, that's what actual thoughtful economic analysis suggests is the case. As recent modeling by researchers at Harvard suggests: "With a relatively modest carbon tax -- about $5 per ton of CO2 -- you could save 31 million tons of CO2 in the United States, and that would change the price of electricity by a barely noticeable amount."
Take those tax receipts and completely recycle them to directly reduce income taxes, BTW, and you could yield net positive economic benefits even aside from any climate-change-related damages.
Look, I'm not closed-minded about alternative solutions to carbon tax policy and especially welcome cogent analysis of its limitations (economic and political) and the challenges of effective implementation. It may well not be the right answer, although after having worked around smart economists for much of my career, that's where most of their analysis has pointed. I welcome groups like AEI (along with RFF, WRI, etc.) taking a sober look at the topic and getting into the pragmatic pros and cons and proper details. A serious, balanced analysis may well show that, the devil being in the details, a real-world carbon tax cannot be "efficient."
But this "analysis" by Zycher isn't serious or balanced. It's an illogical argument based clearly upon a pre-ordained answer. Mr. Zycher has had a long career as a prominent economic thinker, so this is frankly shocking. Please do better.