The Economic Effect of a Carbon Tax Laser Talk

It is true that many economic studies find a revenue neutral carbon tax creates a drag on the economy [2 (three scenarios), 3, 4]. However, it is important to remember that these studies do not include the benefits from fewer climate-related disasters and fewer health costs from burning fossil fuels.

Fee and Dividend Stimulates the Economy

Given this, it is therefore remarkable that some studies find a revenue-neutral carbon tax, what we call Carbon Fee and Dividend, can actually boost the economy even without considering the climate and health benefits of taxing carbon [1, 2 (one scenario)].

Looking closer at one of the studies that found a revenue-neutral carbon tax created a drag on the economy [3], they report an average yearly cost per household of $310 in a scenario that reduced emissions 31% below 2005 levels by 2053, and a $920 cost in a scenario that reduced emissions by 71% by 2053.  Studies that don’t account for externalities paint an incomplete picture

Studies find a revenue-neutral carbon tax can actually boost the economy even without considering the climate and health benefits of taxing carbon

Putting Costs into Perspective

Let’s put these costs into perspective by contrasting them with what we stand to gain by addressing the problem: In 2012, 11 climate-related disasters resulted in $110 billion worth of damages [5] (~$936 in costs per household [6, 7]). Annually, there are $120 billion in health-related damages due to fossil fuel burning [8] (costs of ~$1021 per household per year [6, 9]).

As these costs represent only a piece of the costs already causing a drag on the US economy that could be relieved by addressing our fossil fuel addiction, it is clear that many studies that find a negative effect of a revenue-neutral carbon tax on the economy would find quite the opposite if they accounted for these externalities.

 Note: Each of the economic studies referenced in this laser talk [1-4] are also referenced in a CBO report [10] exploring and summarizing the important considerations and findings for a carbon tax policy. That report highlighted that a carbon tax without revenue return would cause a drag on the economy, that revenue return could possibly increase GDP even without considering environmental, health, and other co-benefits, and that the calculations for estimating the environmental impact are imperfect, because of the difficulty of estimating the most costly effects (catastrophes). Two of the 3 models discussed in this report do not even include costs related to catastrophic climate effects before 2050, and their resulting Social Cost of Carbon estimates should therefore be considered extremely conservative.

Skeptic Claims and One-Liners

Carbon Fee Skeptic Claim: A carbon tax will be bad for the economy
One-Liner: Studies have found completely revenue-neutral carbon taxes may actually give the economy a boost before accounting for the health and environmental benefits.

  1. Sebastian Rausch and John Reilly, Carbon Tax Revenue and the Budget Deficit: A Win-Win-Win Solution? Report 228 (Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change, August 2012)
  2. Warwick J. McKibbin and others, The Potential Role of a Carbon Tax in U.S. Fiscal Reform, Climate and Energy Economics Discussion Paper (Brookings Institution, July 24, 2012)
  3. Anne E. Smith and others, Economic Outcomes of a U.S. Carbon Tax (report prepared by NERA Economic Consulting for the National Association of Manufacturers, February 17, 2013)
  4. See Lawrence H. Goulder, “Effects of Carbon Taxes in an Economy With Prior Tax Distortions: An Intertemporal General Equilibrium Analysis,” Journal of Environmental Economics and Management, vol. 29, no. 3 (November 1995), pp. 271–297
  5. The Editorial Board. “ The Next Hurricane, and the Next”. August 23, 2013. The New York Times.
  6. U.S. Census Bureau, Statistical Abstract of the United States: 2012 (131st Edition) Washington, DC, 2011. Table 59.
  7. Calculation: $110,000,000,000 in damages [5] divided by 117,538,000 households [6] = $936 in damages per household.
  8. The National Academy of Sciences.  The Hidden Costs of Energy: Unpriced consequences of energy production and use.
  9. Calculation: $120,000,000,000 in health-related costs [8] divided by 117,538,000 households [6] = $1021 in costs per household per year.
  10. “Effects of a Carbon Tax on the Economy and the Environment”. May 22, 2013. The Congressional Budget Office. Publication 44223.