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To get at this question, University of Sussex economist Richard Tol has calculated what he evocatively calls the Leviathan carbon tax. Tol defines his Leviathan tax as the maximum carbon tax that is budget-neutral—that is, all other taxes are reduced to zero and replaced by a carbon tax. The Leviathan tax takes into account the carbon intensity of each country, meaning the amount of carbon dioxide generated by every dollar of growth in the economy. He finds that Nigeria and Liberia could finance their entire government budgets with a $1 per ton carbon tax. Any more than that would funnel more revenues into government coffers and grow the size of their governments relative to their private sectors.
Tol uses World Bank tax data that excludes taxes that directly finance social security programs to determine the percent of GDP paid in tax revenues to the U.S. government. Tol calculates that a tax of $223 per ton of carbon dioxide could replace all revenues derived from U.S. income and corporate taxes. To replace all tax revenues, China would have to levy a carbon dioxide tax of $29 per ton; India $45; Germany $267; Japan $450; and the United Kingdom $855 per ton. In each case, collecting more violates revenue neutrality and increases government tax revenues.
Tol then calculated what level a globally harmonized carbon tax would have to reach to limit greenhouse gas atmospheric concentrations (now 390 parts per million) to 650 ppm carbon dioxide equivalent (CO2e), 550 ppm CO2e, and 450 ppm CO2e. The IPCC argues that it will be necessary to keep greenhouse atmospheric concentrations below 450 ppm in order to have at least a 50-50 chance of keeping the increase in global average temperature below 2.0 degrees Celsius. According to Tol’s calculations, that implies a global $149 per ton carbon tax imposed beginning in 2015.
Imposing such a steep carbon in tax in countries like China, India, Russia, and Indonesia would dramatically increase the percentage of their GDP that flows into government coffers, which, in turn, would greatly enlarge their governments. On the other hand, if those nations did not collect a $149 per ton tax, it would mean that other countries would have raise their taxes in order to keep greenhouse gas concentrations below the 450 ppm threshold. By the way, Tol calculates that a $149 per ton tax could replace two-thirds of current federal income tax revenues in the United States.
Assuming that man-made climate change is imposing damage and costs on third parties, there is a strong libertarian case they should be compensated. However, the preferred Coasean policy of establishing and allocating property rights and then allowing negotiations over proper compensation is impractical. If a carbon tax is to be the next best alternative to a property rights regime for mitigating harms caused to third parties by future climate change, it should be revenue neutral and globally harmonized.
History reveals that the prospect of government fiscal restraint in the presence of new revenue streams is not promising. For example, Thomas Pyle, the president of the Institute of Energy Research, has pointed out that the top rate of the new U.S. income tax in 1913 started out at 7 percent, but under pressure of World War I reached 77 percent by 1918. In addition, Tol’s Leviathan Tax analysis suggests that it is unlikely that a globally harmonized carbon tax is achievable. One counter-argument is that if the U.S. and other developed nations were to adopt a high carbon tax this could spur more rapid technological development of cheaper no-carbon and low-carbon energy technologies that poorer countries could then adopt to leapfrog over further burning of coal, natural gas, and oil.
In 1988, Coase argued, “The fact that governmental intervention also has its costs makes it very likely that most ‘externalities’ should be allowed to continue if the value of production is to be maximized.” Considering how well governments afflicted by political conflicts of interest, chronic corruption, and inherent incompetence can be expected to execute a carbon tax, global warming is likely just such an externality.