The Case for a Carbon Tax

Americans are paying less than the full cost of their energy use.

Desperate to do something about the nation's gargantuan deficits but depressed about the possibility of raising income taxes, some in Washington think they have found the pefect fix: a carbon tax. They are pursuing the right answer to the wrong question.

Washington is not swimming in red ink because it is low on funds. As The Wall Street Journal pointed out a few days ago, "individual income tax payments are now up $233 billion over the last two years, or 26 percent," and overall tax revenue is at an almost historic high. Washington's problem is spending.

Still: Even Grover Norquist—the Carrie Nation of taxation (she described herself as "a bulldog running along at the feet of Jesus, barking at what He doesn't like")—says a carbon tax offset by tax cuts elsewhere would not violate anti-tax pledges. In political circles, this is called giving people cover.

But why institute a carbon tax, if not to raise revenue? In brief: Because it would reduce harm in the future and compensate for harm in the past.

You don't have to take anything Al Gore says as gospel to recognize that today's climate-change skeptics resemble the anti-anti-communists of decades past, who displayed what Alexander Solzhenitsyn correctly described as "a desire not to know." American leftists infatuated with the fantasy of egalitarian utopia did not want to believe those on the right who exposed the savage reality of Communist totalitarianism. Climate-change skeptics today do not want to believe climate-change alarmists, who propose big-government solutions. So the doubters refuse to concede the problem.

But intellectually honest skeptics cannot ignore facts they do not like. Hence more and more former deniers are concluding as physicist Richard Muller has: "Three years ago I identified problems in previous climate studies that, in my mind, threw doubt on the very existence of global warming," he wrote in The New York Times this summer. "Last year, following an intensive research effort involving a dozen scientists, I concluded that global warming was real and that the prior estimates of the rate of warming were correct. I'm now going a step further: Humans are almost entirely the cause." Tellingly, climate-change conversions all seem to go in one direction. If evidence were mounting that global warming is fake, then some believers would become debunkers.

It is an ill wind that blows no man any good, and global warming will have salutary effects for some parts of the planet. For example, it could increase agricultural yields and lead to milder winters. But even those who say the overall harm from climate change is overstated concede it exists.

How much harm does climate change do? Estimates vary wildly. But even those who are ideologically indisposed to environmental alarmism consider a social cost of $25 per ton of carbon-dioxide emissions defensible. Economists call social costs not reflected in the price of goods negative externalities, and have different notions about how to address them. The Coase Theorem assigns property rights to everyone involved, which would seem like a daunting task on the global scale. The Pigovian approach taxes producers to make them internalize the costs.

Both approaches recognize inflicting harm on others without consent or compensation is wrong. Earlier this year, Reason's Ronald Bailey quoted law professor Jonathan Adler on that very point: "It is a well recognized principle of common law that if company A is flooding the land of person B, it is irrelevant whether company A generates lots of economic prosperity…A's action would still violate B's property rights, and B would be entitled to relief of some sort. By the same token, if the land of a farmer in Bangladesh is flooded, due in measurable and provable part to human-induced climate change, why would he be any less entitled to redress…? Property rights should not be sacrificed as part of some utilitarian calculus."

There is another free-market reason to support a carbon tax: It would level the energy playing field. Washington should not be lavishing taxpayer subsidies on either renewable or fossil fuels; it should let market forces dictate which energy sources prevail. But doing so requires that prices reflect actual costs. A carbon tax applied to energy producers, who then pass it on to consumers, would help ensure they do.

Opponents will raise any number of objections. For instance, China's CO2 emissions have begun to outpace U.S. emissions. True. But while aggregate U.S. emissions have returned to 1990 levels thanks to the natural-gas boom, most of the CO2 now in the atmosphere was emitted here, and Americans are still the largest emitters by far on a per-capita basis. Also, the optimal level of a carbon tax isn't perfectly clear. Taxing carbon with an income-tax offset won't compensate the pearl divers of the Tuamotu Islands for rising sea levels. And so on.

But none of those objections is fatal, and the bottom line remains the same: Americans are paying less than the full cost of their energy use, and foisting the difference onto the rest of the world. That's mighty convenient. It just isn't right.