Earlier this week, Robert Murphy, a frequent writer of Econlib Feature Articles, had an excellent critique of a piece on global warming by David Frum. Were I to quote all the good parts, I would end up quoting almost the whole thing. I highly recommend it. Still, I'll quote a few parts and register one small criticism.
Yet Frum's misleading statement about temperature trends is just a warm-up for his central argument, which he gets to later in the article:
Take three worrying long-term challenges: climate change, the weak economic recovery, and America's chronic budget deficits. Combine them into one. And suddenly three tough problems become one attractive solution.Tax carbon.
A tax of $20 a ton, rising at a rate of 4% per year, would over the next decade raise $1.5 trillion, according to an important new study from the Massachusetts Institute of Technology. That $1.5 trillion is almost twice as much as would be recouped to the Treasury by allowing the expiration of all Bush-era tax cuts for upper-income taxpayers.
The revenues from a carbon tax could be used to reduce the deficit while also extending new forms of payroll tax relief to middle-class families, thus supporting middle-class family incomes.
Meanwhile, the shock of slowly but steadily rising prices for fuel and electricity would drive economic changes that would accelerate U.S. economic growth. [The four previous paragraphs are his quote from Frum.]
Now at this point the reader might be confused. How in the world would a $1.5 trillion tax on energy--which Frum himself describes as "shock" that would raise fuel and electricity prices--be construed as "attractive" with respect to the "weak economic recovery"?
This claim illustrates the new rhetorical ploy of proponents of a carbon tax. They know full well that Americans would not support a massive new tax on energy if it were sold merely as a way to avert global climate change--especially if Americans found out (not that Frum knows or would ever tell them) that most economic studies show climate change will shower net benefits on humanity for the next several decades.
Consequently, the advocates of a carbon tax have tried to have their cake and eat it too. They tout the ability of a carbon tax to bring in more revenues (thus reducing the budget deficit) and provide pro-growth tax cuts elsewhere in the federal tax code. Thus it seems like a win-win-win: We save the planet, cut the budget deficit, and make everybody wealthier in after-tax terms.
There's just one problem with this convenient narrative: It totally ignores what the actual peer-reviewed research says. A standard result in the environmental economics literature is the "tax interaction effect," which I summarize in this article. In a nutshell, what happens is that even an "optimal" tax on an alleged negative externality such as carbon dioxide emissions can end up causing more economic damage than its environmental benefits, because of the prior existence of distortionary taxes. In other words, a pre-existing, inefficient tax code is a reason not to impose a new carbon tax.
There's more good content also, especially on Frum's misleading section on global warming itself and his implicit assumption that people can't rationally choose where to live without government input.
One criticism: Bob Murphy writes:
The damage to the economy would be even greater if, as Frum suggests, some of the new carbon tax is not revenue-neutral but instead is spent (i.e. used to reduce the deficit).
I'm not clear why Bob sees reducing the deficit as spending.