The True Costs and Benefits of Carbon Taxes

Carbon Taxes

Carbon taxes and other measures designed to try to reduce our carbon emissions are seen by a great many people as essential these days. They need to think this through more.

We’ve seen a lot of what we could call anti-carbon parades this week, with the focus on what we can do and may need to do to reduce our carbon emissions and presumably get a better grip on the world’s increasing temperatures.

People have been presented a rather dim picture of our future as the earth’s temperature has risen, and even though we’re only talking a degree or two generally, this much warming has scared plenty of people, and so much that we see masses of them marching in the street with their signs and their anger and worry.

We’re not sure what this is supposed to accomplish, as public policy and especially those which so fundamentally affect our way of life isn’t decided at this level, short of revolutions, which no one is expecting. Revolutions are more the stuff of yesteryear or in countries that have a tenuous grip on their people militarily, so this really all boils down to a lot of people venting, which may indeed be an end in itself.

What is sought by these mobs is our taking action to reduce our carbon footprint as they call it, which is supposed to slow down this global warming that so many people are worrying about.

There aren’t many effective ways to control our output of carbon that we could ever stand, and aside from placing production restrictions and restrictions on imports, which really isn’t something that anyone will be doing, we can place various forms of taxation on the use of carbon producing products, carbon taxes in other words.

Whenever we consider making changes, we need to not just react emotionally without thinking very much at all about what would happen if certain ideas are put into place, we need to consider the actual consequences to even have an idea of what may happen and what the costs and benefits are.

The best place to start here is with the alleged benefits of this reduction. We’re not talking about what people are predicting will happen with the climate, and while there is much debate on that, as this needs to be all about what difference these carbon taxes will make, and then weigh the costs of this.

If we see that this won’t make any real difference, then it doesn’t make sense to ever want to pay even a small price to pursue this goal, because the costs would outweigh the benefits. If we are acting rationally, we would never pursue such a thing, and especially not consider wrecking our economy and our way of life for such a purpose, although rational would not be a fitting word to describe the way a lot of people think about this issue.

Carbon taxes really don’t reduce carbon emissions all that much, mostly because the demand for carbon is fairly inelastic. Maybe you don’t need to drive your car as much as you do, but you still need transportation, you still need to heat your home, you still need electricity, and you still need to eat and obtain all of the other necessities, and this part of the demand is very inelastic, and therefore price increases won’t reduce consumption that much.

Reducing Carbon Doesn’t Really Help, But It Sure Hurts

We need these things and if the price of carbon puts up the price of food or electricity, we just have to pay it. At best, a carbon tax will only significantly reduce more elastic demand, but only to a certain degree, as people will not just want to live a minimal existence, aside from perhaps a few fanatics.

While the focus of climatologists has been concentrated on looking to discover how much the world will warm up going forward and the potential effects of various amounts of warming, this approach has been criticized for looking at the issue generally and not practically. We need to get an idea of how much of our carbon emissions is affecting all this if we want to know what sort of difference we can make.

Climatologists using the MAGICC model created by the National Center for Atmospheric Research have run various scenarios, including attainable ones and ones that are way beyond what would be possible. As it turns out, if we stopped emitting carbon altogether, which is of course ridiculous, this would only reduce global warming by 0.2 degrees Celsius by 2050.

This is a meaningless amount really and the cost would be the end of civilization as we know it. This would end up completely destroying the economy as well as severely reducing the amount of food that is grown to feed all those billions. It takes carbon and lots of it to grow food, and to transport it, and people would be down to growing their own food on their own land to survive, with people killing each other over this food, which means that there would not be that many of us left eating.

That is very far from what would be possible with so-called carbon reform though, so we need to ask ourselves what sort of temperature reduction would be realistic. This number comes in a lot lower of course, and 0.05 degrees Celsius should not excite us very much.

As it turns out, the great majority of the carbon in our atmosphere is created not by humans but by nature, and while we are in a period of relative warming, we’re coming out of a mini ice age so that is to be expected. It was actually quite a bit warmer 800 years ago than it is now, and it will take quite a while to get back there even with the most overstated models out there.

The polar ice cap was so reduced back then that Greenland was actually green instead of being covered by glaciers as it is today. We survived that quite well, and while there is always adaptation required, and in our case that may mean needing to cut down on the population whether we like it or not, this is just how civilizations are forced to evolve over time.

Carbon taxes therefore really don’t do any good, but they sure can do much harm, and the harm side is something that people don’t tend to look at very much either. Many people have beliefs that we can just wave a magic wand or want it bad enough and we can then severely restrict carbon emissions, but this is purely the stuff of fantasy. When we want to change the world, we need to make sure that our changes are grounded in reality and in fact.

Few people like taxes, at least personal taxes, although they generally don’t have much of a problem with taxing companies. If we just tax companies with a carbon tax, or make them bear the brunt of the tax, then it might not be so bad or even a good thing, as these greedy companies make way too much money and we should make them pay a bigger share.

You don’t have to know all that much about economics to know that companies don’t actually pay taxes, they just pass them along and do so by their very nature. Taxes always end up being paid by the consumer because they are the ones that do the paying in the end, all of the paying in fact.

While the economics of taxation can difficult for most people to relate to, with references to things like GDP and inflation, there are two things that a carbon tax produces that anyone can easily understand. The first thing that happens is that your income gets reduced, by the amount of the carbon tax that you pay.

Some might think this this will really only affect those who drive their cars a lot, the carbon footprint extends way beyond this and touches everything. There is not a single good or service that is immune from a carbon tax, although some things hit harder than others, the price of electricity for instance.

There is Much to Fear from Carbon Taxes

The second effect is that there will be a lot of people losing their jobs. It has been calculated that just a $25 per ton carbon tax in the United States will cost a million jobs and trillions of lost income overall. We might think that this may be worth it to save the earth, but with benefits of a few hundredths of a degree as our reward, it simply is senseless to compare these outcomes and somehow prefer such a terrible option.

$25 a ton is actually a very small amount and the lowest end of the scale as far as what some believe we need, and as the price rises, so does the costs, in proportion, while the meaningless benefits also grow in proportion, from meaningless to still meaningless. If getting rid of carbon emissions entirely won’t matter, neither will fractions, no matter how big the fraction.

Europe, which is considerably more populist than the United States, and also has the highest carbon taxes in the world at $168 per ton, is already paying the price economically, and are fighting hard to fend off a recession, a battle they may not win.

There is no dispute that increasing taxes constrict the economy, and do so considerably, because they take money out of the economy. Less money in the economy means less growth, and this effect continues to bear on it, it does not stop at zero and starts going into the negative.

This is the path that they have chosen, so far anyway, and what is driving this zeal is the illusion that they are changing the world. They actually are, but the only real effect is their bringing down the world economy as well as theirs, due to how connected everything is these days.

Carbon taxes are in fact simply terrible, and if we insist on demanding higher and higher taxes, this will lead to great economic harm. There are few limits on how far we could go, and it’s even conceivable that we may be willing to drive ourselves even into a depression, and people may not even be that aware that it was their mistaken pursuit of higher taxes that was behind it.

If we can’t rely on the media to better enlighten people about just how tiny the benefits here and just how big the costs are when it comes to carbon taxes, and we see the long parades continue, there’s no telling how much we may want to hurt ourselves. The U.S. has taken a more enlightened approach thus far, but if we ever get a genuine left-wing president, all bets are off.

That portion of the political spectrum easily casts off things like practicality, and possibility is often not even a constraint, so it’s pretty conceivable that big carbon taxes and some pretty meaningful ones may one day hit U.S. shores.

Europe, on the other hand, leans more to the left and have really been aggressive with carbon taxes, although this only really applies to democratic leftists, as the Chinese aren’t having very much of this either, although in their case there’s more on the line here than economics when the very air that you breathe is so unhealthy.

The carbon battle has even put us in a position where we may see all the lobbying that goes on in American politics to serve an important function. Buying influence like this is not always used against the public, and to the extent that they can lobby to keep carbon taxes away, this is a lot bigger benefit than the great majority of people realize.

This may actually even be our saving grace, as if people are left to their own on this, this would be ugly and is just looking uglier. We need someone to fight for our economic welfare. Mainstream media, which leans to the left as well overall, is very biased in favor of carbon taxes and exerts their influence every day. Keeping the mob out of the castle is becoming increasingly difficult, so there is much left to do if we are to avoid being overrun by populism.

The only real solution is to better educate people on the issues of carbon taxation and present it in a much truer light than it appears to just about everyone these days. That includes both telling them how much positive change they may expect as well as what the costs are to achieve this.

Allowing people to not just make decisions but make more informed ones is never too much to ask. The truth does not always set us free but will at least get us closer.

Monica

Editor, MarketReview.com

Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.