In Eating One’s Young and Pricing Carbon Does Not a Market Make, I observe an obvious fact: a carbon tax is not collected if there are no emissions. Tax revenues exist only where abatement policy has failed. Where policy succeeds, both revenues and emissions are zero. This direct relationship between emissions and revenues creates a political tug of war, pitting the goal of fewer emissions against popular demand to fund dividends and tax breaks. There is no symbiosis.

There is, however, a more important issue. If the tax is collected only when CO₂ is emitted, why bother? The answer is manipulation – exerting pressure on person “A” to stop person “B’s” harmful behavior. A key, if not primary, strategy of a carbon tax is to increase the cost of carbon intensive goods. Thus, consumers will be pressured into purchasing less gasoline, less non-renewable electricity, etc., which, in turn, will indirectly pressure polluters to be less so.

Goulder and Hafstead put it this way.

A third advantage is that emissions pricing tends to encourage more efficient use of demand-side conservation than that of conventional regulations. Under conventional regulations, firms are compelled to reduce emissions but are not charged for whatever emissions they continue to generate after they have undertaken some abatement. As indicated in various studies, this implies that prices of output are below the levels that would bring about the most efficient amount of demand-side conservation. To reduce emissions, firms rely principally on input substitution or end-of-pipe treatment; without the sufficient increases in prices of output, consumers of energy goods such as electricity do not face the full incentive to reduce their consumption. In contrast, emissions pricing exploits the demand-conservation channel by yielding output prices closer to the efficiency-maximizing level.

Goulder, Lawrence and Hafstead, Marc. Confronting the Climate Challenge: U.S. Policy Options . Columbia University Press (2018). Kindle Edition. (Footnotes omitted; emphasis supplied).

Gilbert Metcalf’s language is less technical.

Part of the appeal of a carbon tax is that it uses markets to solve the pollution problem. Rather than mandating new carbon-free technologies or subsidizing clean-burning fuels, a carbon tax acts as a price on pollution that steers millions of people toward activities and purchases that reduce our carbon footprint. As the carbon tax raises the cost of burning fossil fuels, people react by buying more fuel-efficient cars and investing in more home insulation and higher efficiency furnaces, among other things. Factories purchase more fuel-efficient boilers and source less energy-intensive intermediate goods used in production, along with a host of other activities.

Metcalf, Gilbert E.. Paying for Pollution, Why a Carbon Tax is Good for America. Oxford University Press (2019), p. 45.

On the surface, sensible. Trouble, however, lurks beneath.

A carbon tax is like tariffs on imports. If American prices on Chinese imports are higher, we buy less from China, which is then indirectly pressured to change its policy on intellectual property and on other issues. In a broader sense, the same tactic was used in the recent government shutdown over border security funding. Pain was inflicted on federal employees and those using government services to indirectly pressure one branch of government into agreeing with another.

In all three situations – tariffs, government shutdown and carbon tax – pressure is applied to bit players to cause a lead actor to change its lines. Some might call it hostage-taking. Certainly, consumers will be caught in a crossfire. At best, this indirect pressure is unfair; fairness is often the victim of efficiency. Personally, I find chilling the Huxleyan prospect of Wilsonian technocrats bending taxation into a shepherd’s crook to herd our citizenry. Some may find it good public policy, to which I say, “Pay no attention to the man behind the curtain.”

Ultimately, “carbon taxes will have to confront the political optics of their blunt imposition of higher prices on familiar commodities.” (Rabe, Barry G. Can We Price Carbon? MIT Press (2018), p. 203.) The burden of reducing carbon should be directed at polluters. Consumers cannot be manipulated into doing the work for us. I believe there is a better way.

Best,

Bob