A major, if not the primary, reason to tax carbon is to make carbon intensive goods more expensive. Tax proponents say we will buy fewer of these goods if they cost more. Lower sales will encourage producers to shrink their carbon footprint.

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.¹Metcalf, Gilbert E.. Paying for Pollution, Why a Carbon Tax is Good for America. Oxford University Press (2019), p. 45.

How well will this strategy work? It had better work well. Transportation accounts for 29% of U.S. greenhouse gas emissions. Electricity produces 28%. Demand for transportation fuels and electric power must decline dramatically to achieve carbon neutrality. If tax-induced price increases do not work well, we will get inadequate emission reductions in exchange for more expensive gasoline and electricity.

Tobacco is not a model for carbon.

I have doubts about the probability of success. National, state and local governments do some things quite well when government controls key components such as funding and management. Infrastructure projects such as highways, Hoover Dam, TVA, etc. generally achieve their goals. The Manhattan Project was spectacularly successful. Our national defense is second to none. Governments define and track property interests allowing markets to function. There is not much beyond government’s control in these examples.

In comparison, government policies requiring changes in consumer choices are not nearly as successful. When consumer cooperation is needed, I feel the risk of failure is significant. Prohibition was so dismal a failure we had to repeal it. State by state, consumers are forcing acceptance of recreational marijuana. If tax-induced price increases are to be successful, a carbon tax must not follow these precedents.

The experience with taxing tobacco is often cited as an example of how taxes can manage consumption. I believe the analogy is over sold.

Even the hope of mounting an effective campaign to phase out fossil fuels that follows the playbook of the tobacco control case seems naïve on closer review. Decades of active promotion of tobacco use through aggressive advertising and subsidized production still failed to lure more than one-half of adult Americans to smoke. Its addictive qualities were potent and yet tens of millions of citizens found effective paths toward use reduction or elimination. Tobacco consumption was hardly necessary to meet fundamental daily needs or sustain the national economy. It is, in many respects, more of an optional or even luxury good than an essential one, albeit one that can create a chemical dependency that compels ongoing use. There has been an ever-growing set of products and programs that facilitate transition away from significant use, including the controversial alternative of e-cigarettes that avoid direct tobacco combustion while sustaining tobacco use.²Rabe, Barry G.. Can We Price Carbon? (American and Comparative Environmental Policy) (pp. 13-14). The MIT Press. Kindle Edition.

Add to these reasons the clearly understood link between tobacco and personal harm. Then, contrast that with the not yet widely internalized link between CO2 and climate change. Cigarettes cause cancer, COPD, heart disease and other nasty conditions while CO2 is neither acutely nor chronically toxic. Tobacco smoke affects both the user and nearby persons while CO2 does not act locally; it acts globally. We all know someone who has been affected by the horrific effects of smoking. My father, mother-in-law and father-in-law were victims. On the other hand, I suspect few Americans fueling their cars feel as closely connected to California wild fires, hurricane Irma or falling oceanic pH. Major personal risk factors working against tobacco are not relevant to carbon.

If it were, it’s still not enough.

Clearly, tobacco and carbon are not analogous situations. Even if they were, however, replicating the tobacco experience will not be enough. The Federal Trade Commission reports cigarette sales declined from 478.6 billion cigarettes in 1997 to 229.1 billion in 2017, a 52% reduction while the Bureau of Labor Statistics reports cigarette prices increased 328% between December 1997 and December 2017. This 52% volume reduction in exchange for a 328% price increase suggests increasing the price of cigarettes by 10% will reduce sales by 1.6% over the long term. This ratio is likely overstated considering the health, economic and political factors described above also contributing to lower cigarette use.

We will need to do much better than the tobacco playbook. In 2014, the Energy Information Administration reported “Gasoline prices tend to have little effect on demand for car travel.” The Bureau of Labor Statistics, in the March 2016 article “Using gasoline data to explain inelasticity“, stated,

Noting the continuous demand for gasoline and the relative stability of the estimated gallons of gasoline bought quarterly between 2004 and 2014, it is difficult to identify what will alter this trend. It seems that a doubling in price per gallon did not alter consumer’s consumption habits.

On the other hand, some recent papers state the response of gasoline demand to price increases,³See, for example, Price Elasticity of Demand for Gasoline; and Levin, Laurence, Matthew S. Lewis, and Frank A. Wolak. 2017. ” High Frequency Evidence on the Demand for Gasoline.” American Economic Journal: Economic Policy, 9 (3): 314-47. i.e., the price elasticity of gasoline demand, is greater than previously believed.

It does not appear, however, this research involved gasoline price increases as large as those imposed on tobacco.⁴If such research exists, please let me know. In short, we may not know the extent to which gasoline or, I assume, electricity demand will change if prices increase 300%, 400% or more under a tax.

If the cigarette tax experience defines our expectation for a carbon tax, we need to do much better. The 80/20 principal, in which 80% of the job is accomplished for 20% of the cost, may be at work here. Each incremental tax increase will likely produce diminishing returns, an incrementally smaller decrease in gasoline demand. Is a package of 328% price increases and 52% demand decreases acceptable? Can we rely on on the tobacco experience where, on average, increasing prices by 100%, i.e., doubling them, reduced sales by 16%?

I think not.

Best,

Bob