Summary

My colleagues Kyle Pomerleau and Shuting Pomerleau propose a “carbon”
(greenhouse gas emissions) tax as a fiscal tool with which to finance an extension of the
individual income tax reductions implemented in the 2017 Tax Cuts and Jobs Act. They
argue that such a tax would improve aggregate economic efficiency, in particular by
reducing the purported negative externalities created by GHG emissions.

Their climate externality rationale for a carbon tax is deeply problematic because
the effect of their proposed tax on the purported externality — even under extreme
assumptions — would be on the order of 0.05°C, thus indistinguishable from zero as a
statistical matter, and therefore undetectable. Moreover, the common argument that GHG
emissions create a negative climate externality ignores the incontrovertible benefits of
increasing atmospheric concentrations of GHG, and also the systematic absence of
evidence of a climate “crisis” attendant upon those increasing concentrations. There is no
evidence of a climate “crisis” in terms of temperature trends, polar sea ice, tornadoes,
tropical cyclones, wildfires, drought, flooding, ocean alkalinity, polar bear populations, and
other central climate parameters.

In economic terms, the central integrated assessment models do not forecast
important adverse economic effects in terms of global GDP growth attendant upon anthropogenic climate change over the course of this century. Instead, those analyses
project that anthropogenic climate change, if unaffected by public policies, would impose
very small economic costs by the end of the century, and even that projection ignores the
benefits of increasing atmospheric concentrations of GHG.

The Pomerleaus in their discussion do not invoke the social cost of greenhouse
gases (“carbon”), and so the discussion here does not fault them for the large analytic flaws
inherent within it. But many advocates of policies to reduce GHG emissions do invoke it
as a way to circumvent the trivial prospective effects of those policies on actual climate
phenomena, and so those large analytic flaws are an appropriate topic for this critique.

The SCC-GHG as estimated by the Obama and Biden administrations applies a
GHG scenario that is virtually impossible. The climate models used to estimate the SCGHG overstate the satellite temperature record for the lower atmosphere by a factor of
about 2.3. The SC-GHG incorporates the asserted global effects of U.S. GHG emissions
and increasing atmospheric concentrations of GHG, despite the fact that the effects of U.S.
emissions are trivial, and most such effects, whether consistent with the evidence or not,
will be borne by individuals not residing within the U.S., and thus essentially unaffected
by U.S. policies. The federal government calculation of the SC-GHG is driven in
substantial part by the inclusion of “co-benefits” in the form of reductions in criteria and
hazardous air pollutants already regulated by EPA. Finally, the SC-GHG employs discount
rates artificially low to evaluate the purported future streams of benefits and costs
engendered by GHG policies, on the basis of “equity” and other rationales that are not
correct analytically.

The Pomerleaus’ argument that their proposed carbon tax would yield revenues
offsetting the deficit implications of an extension of the individual income tax cuts of the
2017 TCJA is problematic in that their rough estimates of those revenues are trivial in terms
of the prospective aggregate budget deficits projected by the OMB and the CBO. Even
though their rough revenue projections would be a substantial percentage of the revenues
lost due to an extension of the individual income tax provisions of the TCJA, a simple
public choice analysis suggests strongly that “deficit reduction” would not prove to be the
use to which the revenues would be put in a political equilibrium. Instead, there would be
powerful incentives to use the revenues for new spending programs, an outcome consistent
with the Pomerleaus’ earlier proposal that a carbon tax be used to finance an expansion of
the child tax credit.

At an administrative level, the carbon tax would necessitate the implementation of
border tax adjustments for imports of foreign goods and exports of U.S. goods. Such a
system of border adjustments would be hugely complex and afflicted with political
pressures and arbitrary measurements. An increase in the efficiency of aggregate resource
use is very far from the likely net outcome.

The Pomerleaus’ proposal would not represent sound energy or environmental
policy, and should be viewed with substantial skepticism.

Read the full working paper below.

Pomerleaus-on-TCJA-and-carbon-tax-Zycher-draft-2-July-2024Download