US CBO Skeptical of Carbon Tax

Introduction:  HuffPost Gets Huffy over CBO Analysis

In a baffling repudiation of the federal government’s own scientists, the Congressional Budget Office (CBO) last week said that climate change poses little economic risk to the United States in the next decade.

The statement, which went so far as to highlight dubiously positive effects of rising global temperatures, poses a potential hurdle for future legislation to curb surging greenhouse gas emissions, experts said, and amounts to textbook climate change denial.

What CBO Actually Said

The US Congressional Budget Office released the document Options for Reducing the Deficit: 2019 to 2028 (Title is link to pdf)  It consists of 35 policy options of which #35 is Impose a Tax on Emissions of Greenhouse Gases. The discussion is as follows (text in italics with my bolds).

Background

The accumulation of greenhouse gases in the atmosphere— particularly carbon dioxide (CO2), which is released when fossil fuels (such as coal, oil, and natural gas) are burned and as a result of deforestation—contributes to climate change, which imposes costs on countries around the globe, including the United States.

Many estimates suggest that the effect of climate change on the nation’s economic output, and hence on federal tax revenues, will probably be small over the next 30 years and larger, but still modest, in the following few decades. Among the more certain effects of climate change on humans over the next several decades, some would be positive, such as reductions in deaths from cold weather and improvements in agricultural productivity in certain areas. However, others would be negative, such as declines in the availability of fresh water in areas dependent on snowmelt and the loss of property from high-tide flooding and from storm surges as sea levels rise. Uncertainty about the effects of climate change— and the potential for unlimited emissions to cause significant damage—grow substantially in the more distant future.

Scientists generally agree that reducing global emissions of greenhouse gases would decrease the magnitude of climate change and the expected costs and risks associated with it. The federal government regulates some emissions in an effort to reduce them; however, emissions are not directly taxed. A well-designed tax that covered most energy-related emissions would be expected to reduce emissions.

Greenhouse gas emissions are typically measured in CO2 equivalents (CO2e), which reflect the amount of carbon dioxide estimated to cause an equivalent amount of warming. Under current law, emissions are projected to decline from 5.4 billion metric tons of CO2e in 2019 to 5.2 billion metric tons of CO2e in 2028.

Option

This option would impose a tax of $25 per metric ton on most emissions of greenhouse gases in the United States—specifically, on most energy-related emissions of CO2 (for example, from electricity generation, manufacturing, and transportation) and some other greenhouse gas emissions from large manufacturing facilities. To simplify implementation, as well as to provide incentives to deploy technologies that capture emissions generated in the production of electricity, the tax could be levied on oil producers, natural gas refiners (for sales outside the electricity sector), and electricity generators. The tax would increase at an annual inflation-adjusted rate of 2 percent.

Revenues—Option 35 Impose a Tax on Emissions of Greenhouse Gases (Billions of Dollars)

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019– 2023 2019– 2028
66.0 103.4 105.9 108.2 111.2 115.1 118.9 119.5 123.2 127.1 494.7 1,099.0

Effects on the Budget

According to estimates made by the staff of the Joint Committee on Taxation and the Congressional Budget Office, implementing this option would increase federal revenues by $1,099 billion from 2019 through 2028. On average, about 5 billion metric tons of greenhouse gas emissions would be taxed each year over that period. Taxed emissions would be roughly 4 percent lower than projected under current law in 2019 and 11 percent lower in 2028. Despite the projected decline in emissions over the 10-year period, tax revenues would rise over time because the additional revenues caused by increases in the tax rate would more than offset the decrease in revenues caused by the decline in taxable emissions. A tax that was somewhat higher or somewhat lower than the $25 dollar per ton tax considered in this option would generate a roughly proportionally larger or smaller amount of revenues.

A tax on greenhouse gas emissions would reduce taxable business and individual income. The resulting reduction in income and payroll tax receipts would partially offset the increase in excise taxes. The estimate for the option reflects that income and payroll tax offset.

The estimate for this option is uncertain for two key reasons. First, the projected amount of emissions released in the absence of the tax depends on estimates of future economic activity and future changes in the relative prices of various fuels and energy technologies, both of which are uncertain. Second, even if projections of future emissions under current law are accurate, estimated reductions in emissions stemming from the tax are uncertain, in part because they depend on the development of new technologies and on individuals’ and firms’ reactions to the changes in prices that the tax would induce. CBO’s estimates of reductions in emissions rely on past responses to such changes, as reported in the published literature.

Other Effects

An argument in favor of this option is that it would reduce U.S. emission of greenhouse gases and would do so in a cost-effective way. In particular, the tax would reduce emissions in a more cost-effective manner than regulations because such a tax would create uniform incentives for businesses and households throughout the economy to reduce their emissions. The tax would increase the cost of producing carbon-intensive goods and services in proportion to the amount of greenhouse gases emitted as a result of their production and consumption. Moreover, those cost increases would trigger corresponding increases in the prices of consumer goods. As a result, the tax would provide incentives for businesses to produce goods in ways that yield fewer emissions (for example, by generating electricity from wind rather than from coal) and for individuals to consume goods in ways that yield fewer emissions (for example, by driving less). Specifically, this tax would motivate emission reductions that cost less than $25 per ton to achieve, but not those that would cost more than $25 per ton.

Although the effects of climate change on the U.S. economy and on the federal budget are expected to be small in the next few decades, the effects are much more uncertain—and potentially far larger—in the more distant future. Many scientists think there is at least some risk that large changes in global temperatures will trigger catastrophic damage, causing substantial harm to human health and well-being as well as the economy. Moreover, greenhouse gases are long-lived, affecting the climate for many decades after they are emitted. As a result, delaying actions to limit emissions reduces the possibility of avoiding potentially harmful future effects. Because this option would take effect in January 2019, it would help avoid the compounded problems that might be caused by such delays.

An argument against a tax on greenhouse gas emissions is that curtailing U.S. emissions would burden the economy by raising the cost of producing emission-intensive goods and services while yielding uncertain benefits for U.S. residents. For example, most of the direct benefits of lessened emissions and associated reductions in climate change might occur outside of the United States over the next several decades, particularly in developing countries that are at greater risk from changes in weather patterns and an increase in sea levels.

Another argument against this option is that reductions in domestic emissions could be partially offset by increases in emissions overseas if carbon-intensive industries relocated to countries without restrictions on emissions or if reductions in energy consumption in the United States led to decreases in foreign fuel prices. More generally, averting the risk of future damage caused by emissions would depend on collective global efforts to cut emissions. Most analysts agree that reducing emissions in this country would have small effects on climate change if other countries with high levels of emissions did not also cut them substantially (although such reductions in the United States would still diminish the probability of catastrophic damage and could spur other countries to cut their emissions).

An alternative approach for reducing emissions of greenhouse gases in a cost-effective manner would be to establish a cap-and-trade program that set caps on such emissions in the United States. Under such a program, allowances that conveyed the right to emit one metric ton of CO2e apiece would be sold at open auction. The overall number of allowances in a given year would be capped, and the cap would probably be lowered over time. If the caps were set to achieve the same cut in emissions that is anticipated from the tax, then the program would be expected to raise roughly the same amount of revenues between 2019 and 2028. In contrast with a tax, a cap-and-trade program would provide certainty about the quantity of emissions from sources that are subject to the cap (because it would directly limit those emissions), but it would not provide certainty about the costs that firms and households would face for the greenhouse gases that they continued to emit.

Footnote: Additional CBO Response to HuffPost

In a lengthy statement to HuffPost, the CBO referred to three of its own past reports, including one that said, “Even under scenarios in which significant climate change is assumed, the projected long-term effects on GDP would tend to be modest relative to underlying economic growth.”

“Although CBO has not undertaken a full analysis of the budgetary costs stemming from climate change, it has recently analyzed the potential costs of future hurricane damage caused by climate change and coastal development,” read an excerpt from one report highlighted in the statement. “All told, CBO projects that the increase in the amount of hurricane damage attributable to coastal development and climate change will probably be less than 0.05 percent of GDP in the 2040s.”

The agency’s report attributed differing climate predictions to “the imperfect understanding of physical processes and of many aspects of the interacting components (land, air, water, ice, and all forms of life) that make up the Earth’s climate system.”

My Comment

The US Congressional Budget Office is required to examine any reasonable and feasible policies to reduce the government’s operating deficit. In that context, it looked at pricing carbon emissions and projected revenues and economic effects. Arguments for and against the policy option were summarized accordingly. Alarmists are intolerant of arguments against their preferred objective to keep fossil fuels in the ground. On the other hand, CBO weighs likely negative economic effects against the unlikely prospect of concerted international cooperation to reduce emissions.

via Science Matters

http://bit.ly/2RanlBK

December 21, 2018 at 02:47PM

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