Observations on the Alliance for Market Solutions’ “Conservative” Case for a Carbon Tax

Benjamin Zycher MAY 2019

AMERICAN ENTERPRISE INSTITUTE Executive Summary

he Alliance for Market Solutions (AMS) has pro- or delays of scheduled increases, analyzed under a Tposed a tax on “carbon” (emissions of green- “current law” rather than a “current policy” orienta- house gases, or GHG) as a “market-oriented solution tion. A “current law” perspective is wholly legitimate to one of America’s most pressing economic chal- and applied often in serious analyses, but in the con- lenges: . . . reducing carbon pollution.” It is among the text of the AMS proposal for a revenue-neutral car- more prominent of the proposals for a carbon tax now bon tax, the “current policy” assumption is far more drawing attention from policymakers and observers. realistic—in my view—because the current tax poli- This proposed carbon tax is described and intended by cies are unlikely actually to be allowed to lapse. AMS to be “revenue neutral” and part of a policy shift In short, the proposed AMS carbon tax is indepen- away from a regulatory regime for reductions in GHG dent of any actual environmental parameters, despite emissions, a shift that AMS argues would improve eco- its central asserted justification as a climate policy. nomic efficiency. Instead, it is a device intended to avoid a large increase Those arguments are problematic. Despite the in the budget deficit in the next10-year budget win- AMS focus on reducing GHG emissions as a pol- dow, as AMS admits more or less explicitly. Because icy addressing a negative environmental (climate) AMS does not ground its carbon tax proposal on a dis- externality and despite the AMS claim to be “moti- cussion of actual climate phenomena, an analysis of vated by our respect for science,” the actual proposal the magnitude of an assumed GHG externality, or a is not based on any references to actual climate phe- quantification of the environmental effects of its pro- nomena, a calculation of the magnitude of a pur- posed carbon tax, the magnitude of its tax to a sig- ported GHG externality, or an analysis of the climate nificant degree would be arbitrary, driven by AMS’s effects of the proposed tax. Instead, AMS references, preferred tax policies and the purported goal of rev- in passing, the dire climate predictions in two recent enue neutrality. reports, respectively from the Intergovernmental In other words, it is clear that AMS is advocating Panel on Climate Change and the federal govern- whatever carbon tax is needed to make its various pre- ment. These reports assume a future path for atmo- ferred policies (e.g., extending the 2017 tax cuts after spheric GHG concentrations that is unrealistic in 2025) “revenue neutral,” while assuming that adop- the extreme, and both are inconsistent with the find- tion of the carbon tax would not be accompanied with ings in the peer-reviewed literature and the actual any new spending in a congressional bargaining equi- evidence on climate phenomena. librium. It is clear also that the AMS “climate” justifi- Instead of being structured as a correction for a cation for its carbon tax is secondary, as the proposed market inefficiency, the AMS carbon tax much more tax would reduce temperatures in 2100 by 0.015°C centrally can be seen as a financing mechanism for a under assumptions highly favorable toward the AMS series of tax reductions (or extensions) preferred by climate policy stance, a figure smaller than the stan- AMS: “All revenue from a carbon tax should be used dard deviation of the surface temperature record by to reduce other, more distortionary taxes that hinder an order of magnitude. economic growth, including taxes on earnings and That it is revenue rather than any “climate” param- income.” Most of the AMS tax reductions are exten- eters that is the central focus of the AMS proposal is sions of current tax provisions now scheduled to end, illustrated by the AMS “2018 Year-End Report”:

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Pressure to address our country’s long-term fis- politically viable is problematic, as is the AMS asser- cal issues also grew. The Congressional Budget tion of substantial prospective Republican support Office reported that the deficit during the first two for climate policy generally and a carbon tax in partic- months of fiscal year 2018 was 50% higher than it ular. Moreover, the AMS assumption that a carbon tax was during the same period the previous year. And is needed politically to effect a reduction in the GHG the national debt is expected to reach $22 trillion by regulatory regime has been disproved: The Trump early 2019. Fiscally conservative Republicans, whose administration has begun the process of eliminating concerns about the federal deficit appeared to have the Clean Power Plan, weakening substantially the been lost in recent years, started to seriously evalu- transportation-sector fuel economy regulations, and ate long-term spending and revenue issues. The lack has initiated the process of exiting the international of other politically acceptable, multi-trillion-dollar Paris GHG emissions agreement. revenue options forced some conservatives who are It is possible that the AMS argument for a carbon usually unwilling to consider any new form of taxes tax is based upon alternative assumptions and ratio- to quietly contemplate a carbon tax. nales unstated in the various AMS promotional mate- rials and research efforts. One such argument might The implicit AMS definition of an “efficient” tax is be that enactment of a carbon tax by the US would problematic, in that it assumes that the size and com- facilitate an international effort to reduce GHG emis- position of the government budget are independent sions. The specifics of the international agreement of the tax instruments chosen to fund it. The AMS finally reached in Paris in late 2015—in particular, revenue-neutrality pledge would be difficult to achieve the small temperature effect (0.17°C by 2100) of the because a carbon tax in a congressional bargaining intended national contributions, even if taken at face equilibrium would likely be packaged with significant value—do not inspire confidence in this possible new spending compensating the losers, and with other justification for a carbon tax. Even a highly aggres- spending designed to forge a majority political coali- sive and thus implausible international effort would tion willing to impose the carbon tax. AMS recognizes reduce temperatures by only about half a degree. this explicitly in part. Because a carbon tax—and thus A second argument might be that a carbon tax the intended reduction in GHG emissions—must be would engender an incentive to invest in innova- chosen by government, it is not a “market” policy. tions reducing the cost of limiting GHG emissions. Notwithstanding the view of many economists, it is The small temperature effects of such innovation are likely to prove less efficient economically than a reg- striking: Were US emissions reduced by 60 percent, ulatory approach because the revenue stream from the maximum temperature reduction in 2100 would a tax would provide incentives for policymakers to be less than a tenth of a degree, and a 60 percent choose the tax rate that maximizes the present value reduction by the entire industrialized world would of the revenue stream over some time horizon rather yield less than a quarter of a degree. Moreover, such than the rate that optimizes emissions. This outcome innovation is not costless, and the tax would destroy is made more likely by the prospect that the marginal the economic value of part of the existing resource members of the congressional majority in this con- base and capital stock. Accordingly, the innovation text would be those most threatened in the next elec- argument is not far removed from a standard broken tion. That dynamic would be reinforced by the reality windows fallacy: A reduction in wealth can be wealth that the costs of the carbon tax would be hidden in the enhancing. prices of myriad goods and services. As with the tax/ A third argument might be that enactment now budget nexus, the emissions goal is not independent of a moderate carbon tax would begin the process of of the policy tool chosen to achieve it. implementing a US GHG policy, which then could The AMS assumption that a carbon tax coupled be strengthened over time. This rationale confronts with an elimination of the regulatory regime would be the same benefit/cost problem: Seemingly “strong”

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policies would have small effects at most. And at a The AMS carbon tax would not achieve its quali- political level, the demonstrated refusal by several tative stated climate goals, would not prove “revenue Congresses to enact policies yielding even small neutral,” and would be unlikely to prove more effi- GHG reductions does not bode well for the realism cient economically than a regulatory regime. It should of this possible justification. be rejected.

3 Observations on the Alliance for Market Solutions’ “Conservative” Case for a Carbon Tax

Benjamin Zycher

he Alliance for Market Solutions (AMS) describes With respect to “carbon pollution” as “one of Titself as an “organization of conservative leaders America’s most pressing economic challenges,” AMS . . . educat[ing] conservative policymakers on the ben- makes no reference to the substantial scientific dis- efits ofmarket-oriented solutions to one of America’s putes over the timing, magnitude, and implications of most pressing economic challenges: . . . reducing car- anthropogenic increases in atmospheric greenhouse bon pollution.”1 And AMS supports “a revenue-neutral gas (GHG) concentrations. In reality, the science of carbon tax—a policy that would efficiently protect the anthropogenic climate change is vastly more debated environment and deregulate and grow the economy.”2 in the peer-reviewed literature than proponents of (Emphasis in original.) climate policy would have one believe.5 For example, The AMS proposal is worthy of attention in that it by how much would global temperatures rise given a has emerged as one of the more prominent current doubling of atmospheric GHG (“equilibrium climate arguments in favor of a carbon tax, with well-known sensitivity,” or ECS)? The Intergovernmental Panel individuals serving on the AMS board of directors and on Climate Change (IPCC) has no definitive answer, board of advisers and with some attention from policy- offering a range of about 1.5 to 4.5 degrees.6 The makers, particularly in Congress.3 midpoint of that range is substantially higher than The arguments that the AMS carbon tax is a the findings reported in the recent peer-reviewed “market-oriented” policy, that “reducing carbon pol- literature.7 lution” would address “one of America’s most press- ing economic challenges,” and that the tax would “protect the environment and deregulate and grow The AMS Carbon Tax in the Context of the economy” are open to serious question. In its Climate Phenomena “2018 Year-End Report,” AMS states, “We are moti- vated by our respect for science.”4 In the public debate Having described a reduction in “carbon pollution” over climate policy, “science” has come to comprise as “one of America’s most pressing economic chal- several distinct dimensions. There are the tempera- lenges,”8 AMS should have provided (1) some evi- ture and other climate predictions made by the cli- dence in support of that imperative and (2) some mate models used by researchers; there are the many analysis, or even a mere assertion, about the extent to assertions of an ongoing or looming crisis; and there which the AMS carbon tax proposal would reduce the is the actual evidence on climate phenomena. There magnitude of that problem. is also the policy debate, not strictly a component of AMS fails to do either. On the issue of climate evi- climate “science,” but certainly related to it closely. dence, one searches the online AMS materials in vain

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for a systematic discussion of the precise parameters • Such sharp increases in the cost of conventional of the actual climate phenomena engendering the energy would have positive net impacts on “pressing economic challenges.” Instead, AMS limits almost all dimensions of 17 sustainable develop- itself to informing us: ment goals, such as “gender equality.”12

The Intergovernmental Panel on Climate Change It is unlikely that AMS is endorsing all of those and the federal government released ominous specific arguments, although the passage from the reports that detailed the ecological consequences of AMS “2018 Year-End Report” quoted above is curi- the increasing global temperature. The federal gov- ous. However, it is difficult to find in the various -pub ernment’s report, the National Climate Assessment, lished AMS materials an actual proposal that AMS is found that “climate change creates new risks and putting forth as its carbon tax, in dollars per metric exacerbates existing vulnerabilities in communities ton of GHG emissions. One of the papers available across the United States, presenting growing chal- on the AMS website analyzes a carbon tax of $20 per lenges to human health and safety, quality of life, and metric ton (in 2019 dollars), increasing in real terms the rate of economic growth.”9 at 5 percent per year.13 If that is the AMS proposed carbon tax, then it would be less than $33 after 10 AMS should not be willing uncritically to rely on years and about $53 after 20 years. A different paper the international and federal government climate also available on the AMS website analyzes a carbon bureaucracies, in this case the IPCC’s Global Warm- tax beginning at $32 per metric ton, rising to $53 in ing of 1.5°C report10 and Volume II of the federal 15 years and then to $55 in the long run.14 A third government’s Fourth National Climate Assessment.11 assumes a carbon tax of $25 per metric ton, growing These bureaucracies are interest groups whose asser- at 3 percent per year in real terms.15 tions should not be dismissed out of hand, but instead Let us assume the $55 figure. In comparison, the should be subject to examination in light of the usual Obama administration calculated, using a question- standards of rigor and evidence. able methodology, a “social cost of carbon” of about IPCC now argues the following in its Global $50 per ton in 2020 (in 2018 dollars), and the admin- Warming of 1.5°C report, under an apparent assump- istration’s various regulatory proposals (subsumed tion that previous IPCC analyses—in particular, the under the Climate Action Plan) used that calcula- 2013 Fifth Assessment Report (AR5)—no longer are tion for regulatory impact analyses.16 The tempera- relevant: ture effect of those policies, using the Environmental Protection Agency (EPA) climate model, would have • The world has only 12 years to prevent a climate been 0.015°C by 2100, under the maximum IPCC fig- catastrophe. ure of 4.5°C for the ECS.17 The AMS long-run carbon tax of $55 per metric ton • The safe limit for anthropogenic warming is significantly delayed relative to the implicit Obama through 2100 now is 1.5°C rather than the long- “carbon tax” incorporated in its regulatory proposals. argued 2°C. Even if we assume that the temperature effect of the AMS proposal somehow would be double that of the • The midpoint of the taxes on conventional Obama Climate Action Plan, or 0.03°C by 2100, that energy required by 2030 to avoid severe cli- still would be less than a third of the standard devi- mate impacts is $3,156 per ton of greenhouse gas ation of the surface temperature record.18 But AMS (GHG) emissions, or more than $29 per gallon asserts, without exploring anywhere the climate of gasoline, taxes that would rise rapidly over the effects of its policy prescriptions, that its “approach course of the century. and policy prescription can result in a durable solu- tion to climate change.”19

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Table 1. IPCC AR5 Climate System Projections

Climate System Effect Likelihood Confidence

Collapse of Atlantic Meridional Overturning Circulation Very Unlikely High Ice Sheet Collapse Exceptionally Unlikely High Permafrost Carbon Release Possible Low Clathrate Methane Release Very Unlikely High Tropical Forests Dieback Low Boreal Forests Dieback Low Disappearance of Summer Arctic Sea Ice Likely Under RCP8.5 Medium Long-Term Droughts Low Monsoonal Circulation Collapse Low

Source: Thomas F. Stocker et al., Climate Change 2013: The Physical Science Basis (Cambridge, UK: Cambridge University Press, 2013), 1115, Table 12.4, https://www.ipcc.ch/report/ar5/wg1/.

Perhaps more to the point, the new IPCC Global extreme GHG concentration path (“RCP8.5”), to Warming of 1.5°C report is inconsistent with the AR5 which I return below.24 That IPCC analysis is summa- from 2013, which was vastly more detailed and far more rized in Table 1. modest than commonly asserted in its claims about How can it be that the IPCC, having published looming climate phenomena. The new IPCC report these findings in 2013, now believes that only 12 years relies on the 102 IPCC “CMIP5” climate models,20 are available to prevent a climate catastrophe? In its which as a group have overpredicted actual warming by new report, IPCC claims that “there are multiple lines a factor of two to three, combined with the upper tail of evidence that since the [2013 AR5] assessed levels of the AR5 estimated range (1.5°C–4.5°C) of the ECS.21 of risk increased for four of the five Reasons for Con- The median of that range is about 40 percent higher cern (RFCs) for global warming to 2°C.”25 Do another than the average reported in the recent peer-reviewed four or five years of data—in the context of climate literature; the latest research reports an ECS of about phenomena that unfold over centuries or millennia— 1.6 degrees. Climatologist Judith Curry notes: allow “science” to increase its risk assessment of cli- mate phenomena so sharply? Much of th[e] problem [projected in the new IPCC The central focus in Global Warming of 1.5°C is on report] goes away if ECS is actually 1.5 to 2°C. . . . limiting temperature increases to 1.5°C instead of the What evidence is there of potential catastrophes? An 2°C that had been advertised for years as the driving observed increase in extreme weather events is not goal for the global “carbon budget.” One prominent well justified, if you correctly account for the influ- discussion of this shift offers the following illustrative ence of multi-decadal ocean oscillations.22 observation: “Defining a dangerous limit for climate change has been essentially an institutional process, In the AR5, the IPCC is deeply dubious about the not a scientific one.”26 I have discussed this shift in various severe effects often hypothesized or asserted some detail elsewhere, but the central point is that as future impacts of increasing GHG concentra- if we average the temperature increases projected tions.23 The one exception is the disappearance of the by the IPCC for its atmospheric GHG concentration summer Arctic Sea ice, which IPCC views as “likely,” paths closest to the historical averages, we get 2°C— with “medium confidence,” but only under the most that is, a figure exactly equal to the former purported

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goal of international climate policy.27 Accordingly, document so extreme in its assumptions that it is dif- the new 1.5°C goal is a tacit admission by the IPCC ficult to take seriously. that the 2°C limit will be achieved even without any As with the Global Warming of 1.5°C report, the international climate policies at all.28 The interna- Fourth National Climate Assessment, Volume II assumes tional climate bureaucracy figuratively has moved the the IPCC’s RCP8.5 scenario for atmospheric concen- goalposts.29 trations of greenhouse gases through 2100—the most With respect to the evidence on climate phenom- extreme of the four scenarios used by the IPCC in the ena, there is no question that anthropogenic warm- AR5.44 Under RCP8.5, GHG concentrations through ing is real in the sense that some predicted effects 2100 rise at 11.9 parts per million (ppm) on average of increasing GHG concentrations are observable in annually, over six times faster than the average (1.9 the data.30 However, the absence of a trend in lower ppm) for 1985–2018,45 notwithstanding the fact that stratosphere temperatures since the mid-1990s sug- natural gas use is growing relative to coal use inter- gests that the recent “pause” or “slowdown” in sur- nationally, however slowly and unevenly.46 The single face or tropospheric temperatures is not a mere biggest increase was 3.4 ppm in 2016. measurement error.31 Despite the fact that the climate alarmists routinely But there is little evidence—thus far—of serious use RCP8.5 to drive their predictions, this scenario is climate impacts attendant upon increasing GHG difficult to take seriously. For example, under RCP8.5, concentrations. Temperatures are rising,32 but as the global coal consumption rises by about 900 percent by Little Ice Age ended around 1850, it is not easy to sep- 2100.47 That parameter is driven by the dual assump- arate natural from anthropogenic effects on tempera- tion of “high energy use and emissions” and “slow tures.33 Hence, the IPCC range for ECS noted above. GDP growth.” The report is silent on precisely how The latest research in the peer-reviewed literature those two conditions can be made consistent. (At best suggests that mankind is responsible for about half it is difficult.) RCP6 (average GHG increase through a degree of the global temperature increase of about 2100: 5.5 ppm) is far more plausible for discussion pur- 1.5 degrees since 1850.34 poses—coal use in Asia is likely to rise—but under that There is little trend in the number of “hot” days scenario temperatures in the average of the CMIP5 for 1895–2017; 11 of the 12 years with the highest num- climate models rise by about 3 degrees by 2100.48 As ber of such days occurred before 1960.35 Global mean noted above, however, these models have overpre- sea level has been increasing for thousands of years; it dicted warming since the late 1970s (the beginning of may or may not be accelerating.36 The Northern and the satellite record) by a factor of two to three.49 Southern Hemisphere sea ice changes tell different There is nothing wrong with the use of extreme stories.37 US tornado activity shows either no trend scenarios for analytic purposes and sensitivity com- or a downward trend since 1954.38 Tropical storms, parisons, but using the most extreme scenario as the hurricanes, and accumulated cyclone energy show sole basis for climate analysis and policy recommen- little trend since satellite measurements began in dations is unpersuasive. Moreover, the new report the early 1970s.39 The number of US wildfires shows predicts 8°C of warming by 2100, a figure that the no trend since 1985.40 The Palmer Drought Severity IPCC found dubious only in 2013: “Warming above index shows no trend since 1895.41 US flooding over 4°C by 2081–2100 is unlikely in all RCPs (high confi- the past century is uncorrelated with increasing GHG dence) except for RCP 8.5 where it is about as likely concentrations.42 The available data do not support as not (medium confidence).”50 (Emphasis in original.) the ubiquitous assertions about the dire impacts of Again, the dire predictions in the latest NCA are declining pH levels in the oceans.43 driven by the climate models under RCP8.5; those mod- AMS’s reliance on Fourth National Climate Assess- els as a group cannot predict the past or the present. ment, Volume II does not make matters better. Accordingly, they provide a poor basis for policy for- The new National Climate Assessment (NCA) is a mulation. As Patrick Michaels51 points out, a rigorous

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analysis would use the model or models that have would be grounded, at least ostensibly, in some sort done the best job of predicting what is actually hap- of analysis of the resource misallocation engendered pening.52 That turns out to be the Russian INM-CM4 by an assumed GHG externality.55 climate model, which predicts the least amount of Nonetheless, we find that not one of the analyses future warming among all the CMIP5 models.53 Yet the or materials posted on the AMS website makes any authors of the fourth NCA did not use it. But despite attempt to justify the specific assumed carbon taxes the serious biases inherent in the sole use of RCP8.5, as corrections to purported market resource mis- the fourth NCA proceeds on that basis to lay out a allocation created by a GHG externality. Instead, series of policy admonitions. Notwithstanding the various other policies completely independent of curious view of many journalists, policy prescriptions any sort of externality analysis are analyzed (or are not “science,” and scientists have no special claim proposed) as adjuncts to the AMS carbon tax. The to deference on their policy arguments, with all their FTI analysis examines the net effects of a carbon implicit trade-offs and subjective value judgments. tax combined with credits for “energy-intensive, trade-exposed industries,” and the extension of various existing tax cuts and delays in various tax What Is the Policy Goal of the AMS increases as incorporated in existing law.56 The EY Carbon Tax? analysis examines the effects of a replacement of the “existing U.S. carbon emission regulations with a Disagreement over climate policy has induced many carbon tax” under the assumption that a tax is more participants in the debate to descend into the use of “efficient” than a regulatory approach, a premise to such terminology as “carbon pollution.” Note that which I return below.57 carbon dioxide is not “carbon,” and it is not a pollut- The paper by Scott Ganz and Alex Brill examines ant, as a certain minimum concentration of it is nec- the effects of a carbon tax combined with a reduction essary for life itself. By far the most important GHG in in “the tax rate on wage income by a commensurate terms of the radiative properties of the climate system amount.”58 They do not address the effect of higher is water vapor; no one calls it a pollutant, presumably energy costs on employment and wages. Their analysis because ocean evaporation is a natural process. Yet so “assume[s] a $25-per-ton carbon tax and a $10-per-ton are volcanic eruptions, which emit massive amounts domestic average social cost of carbon. We assume . . . of particulates and toxins, pollutants by any definition. that a $25/ton tax with an annual growth rate of 3 per- The debate over climate policy would be improved cent above inflation would reduce CO2 emissions by vastly were the term “carbon pollution” replaced with 18.8 percent on average in 2018–2027.” “GHG,” which has the virtue of scientific accuracy If the domestic social cost of carbon is $10 per without the pejorative implications. ton, what is the justification for a carbon tax of $25 The AMS emphasis on carbon pollution as “one rising at a real annual rate of 3 percent? Those three of America’s most pressing economic challenges” numbers appear arbitrary. Nor did Ganz and Brill dis- appears to be an attempt to justify its carbon tax pro- cuss the climate effects of reducing CO2 emissions by posal in a traditional externality framework: Market 18.8 percent (let us assume for the rest of this cen- prices do not incorporate the (asserted) negative tury) even though that is the ostensible goal of the impacts of GHG emissions, so from a social stand- carbon tax. (The answer, using the EPA climate model point too many resources will be allocated to activ- and an assumed ECS of 4.5°C, is 0.02°C.) ities emitting GHG, and too few to others.54 This Ganz and Brill avoid this problem by referring to long-standing externality framework for policy anal- the Obama administration analysis of the social cost ysis was the motivating force for the Obama admin- of carbon (SCC) and then assuming “that the SCC is istration’s problematic effort to quantify the “social $10 per ton of CO2; we convert this cost to income cost of carbon,” so that its GHG regulatory policies loss per county and distribute the cost at the county

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level depending on a county’s risk profile.” However, Tax Efficiency Obama administration regulatory impact analyses of their various regulatory proposals, such as the Clean The implicit definition of an “efficient” tax in the Power Plan, found that the net benefits of reductions AMS proposal—a tax shift that yields an increase in GHG emissions are almost zero. Virtually all of the in economic growth in the standard tax/macroeco- purported benefits of the GHG emissions regulations nomic models—is problematic. It certainly is true were “co-benefits,” for the most part reductions in that an “efficient tax” in the AMS framework is one particulate emissions.59 that engenders less rather than more distortion of That methodology is deeply problematic. The resource allocation (“excess burden”) in the pri- Clean Air Act explicitly requires the EPA, upon mak- vate sector. This Ramsey rule for efficient taxation ing an “endangerment” finding for a given pollutant, attempts to allocate tax burdens in inverse propor- to promulgate a National Ambient Air Quality Stan- tion to demand and supply elasticities across eco- dard (NAAQS) that “protects the public health” with nomic sectors, so that taxation would have smaller “an adequate margin of safety.”60 Accordingly, the rather than larger effects in terms of resource EPA “co-benefits” benefit/cost analysis of its climate shifts.63 regulatory proposals may be appropriate (efficient) The problem with that standard definition is only if the existing NAAQS for the various pollut- that it assumes that the size and composition of ants fail to satisfy the requirements of the law or if the government budget are independent of the tax the law itself creates a standard that is inefficiently instruments chosen to fund it—that is, that the con- lax. If neither of those conditions is true, then the gressional bargaining process over the budget would co-benefits analysis for GHG will reduce emissions not reflect given shifts in the incidence (the distribu- of the other pollutants to levels that are inefficiently tion of the burdens) of the tax system. That assump- low—that is, to levels at which the marginal costs of tion is open to serious question. Once we recognize reductions exceed the marginal benefits.At least one that the allocation of tax burdens must affect politi- of those three conditions must be true. If a given region cal demands for spending, both in total and in terms is in “nonattainment,” that presumably is evidence of the composition of the budget, then a tax shift that achievement of the NAAQS is more costly in moving the burden of taxation away from the ben- that region than is the case on average, so that impo- eficiaries of spending programs is likely to reduce sition of a standard even more stringent is unlikely allocational efficiency for the private and public sec- to be appropriate. tors considered jointly. It is unlikely to be the case Because AMS does not ground its carbon tax pro- that AMS believes that a shift of the tax burden away posal on a discussion of actual climate phenomena from alignment with the benefits of public spend- or on an analysis of the magnitude of an assumed ing would fail to affect the political demand for such GHG externality, its proposed carbon tax would spending. Brennan and Buchanan summarize this be arbitrary, driven by the purported goal of reve- problem well: nue neutrality. In other words, AMS apparently has chosen various policies that it supports61 (e.g., In commodity-tax analysis . . . the point of departure extending the 2017 tax cuts after 2025) and then is is some presumed requirement that government advocating whatever carbon tax is needed to make raise a fixed and exogenously determined amount of the whole exercise “revenue neutral.” So why a tax revenue. Given this fixed-revenue requirement, the on GHG? Why not on something else? It seems clear question is: How should taxes be levied so as to min- that AMS has chosen a carbon tax because it would imize welfare loss? . . . The orthodox procedure is to raise large amounts of revenue, which makes the car- attempt to answer this question independently of bon tax no more defensible as tax policy than, say, any consideration concerning the uses to which tax Elizabeth Warren’s wealth tax.62 revenues may be put.64

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Accordingly, the correct definition of tax “effi- equally likely, particularly if the taxes to be cut are ciency” is a closer alignment of tax burdens in accor- broad-based, thus benefiting a coalition of interests dance with the differing demands for public services that is not concentrated. (federal spending) across taxpayers or taxpayer Some industries and geographic regions will bear groups.65 Perhaps without realizing it, AMS sim- disproportionate burdens from the tax, and their ply ignores this, assuming implicitly that the size votes will be necessary to enact the tax, particularly in and composition of the government budget would the US Senate. Will their demands for compensation be independent of the “revenue-neutral” tax shift fall on deaf ears? Given, for example, that “coal coun- that it is proposing. That is far from obviously cor- try” gave heavy political support to President Don- rect. If AMS believes that consumers and producers ald Trump precisely because of the Obama political of conventional energy and other activities that are assault on their economic interests,66 it is difficult to GHG-intensive have disproportionate demands for believe that they will be satisfied with only an equal per public services (spending), it should say that and jus- capita share of the revenues, as the carbon tax would tify it. affect them disproportionately. (Actually, because the income tax is graduated, the income tax reductions to be funded with a carbon tax likely would yield pro- Problems Inherent in the AMS Analytic portionately smaller benefits for them on a per capita Framework basis.) Investment flows and wages would be affected more in some sectors and geographic regions than in The AMS analytic framework is problematic in others. Would the complex bargaining process shap- terms of the stated revenue-neutrality objective, the ing legislation simply ignore them? assumed efficiency of a carbon tax, and some political The list of potential supplicants is long, each assertions. comprising some combination of constituencies to protect and campaign contributions and votes to Revenue Neutrality and the AMS Quest for Sub- offer. Indeed,AMS recognizes this explicitly: One of stantial Revenues. The central impact of a carbon the assumed uses of the carbon tax revenues in the tax would be an increase in the prices of conven- FTI analysis is “adjustments for energy-intensive, tional energy, whether small or large, and AMS does trade-exposed (‘EITE’) industries, mostly in manu- not address the prospect that the losers, concen- facturing.”67 Does AMS believe that only those indus- trated both geographically and in specific economic tries would demand compensation from Congress? It sectors, would demand compensation through the is not difficult to envision competition for the reve- processes of congressional bargaining. In particular nues among a large number of interests beyond those because of the supermajority decision rule in the US experiencing net negative economic impacts from the Senate, some substantial part of the carbon tax reve- carbon tax. nues directly or indirectly will be used to compensate The AMS analyses of its tax proposals assume a “cur- interest groups able to form a majority coalition in rent law” policy environment rather than a “current Congress. That majority coalition is likely to change policy” one: Tax and other provisions now scheduled over time, whatever the AMS proposals for offsetting to end in some future year(s) in fact will be allowed to reductions in various taxes. To believe that the benefi- end. That is the driving force underlying the AMS sub- ciaries of the various extensions of tax cuts promoted stitution of carbon tax revenues in place of those lost by AMS would have the revenues from the carbon tax from extension of existing tax provisions scheduled to bestowed upon them, one must assume that those terminate, in particular the 2017 tax cuts now sched- interests would prove to be the marginal members of uled to expire after 2025. There is nothing wrong with whatever congressional coalition imposes the carbon a “current law” starting point for policy analysis; it is a tax. That certainly is possible, but other outcomes are well-accepted approach. But in the context of the AMS

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proposal for a carbon tax, it seems far less realistic than compensatory policies. More broadly, the “revenue- a “current policy” approach, in that a future Congress neutrality” constraint ostensibly central to the AMS is unlikely to allow the middle-class tax provisions of proposal is inconsistent with its underlying analyses, the 2017 Tax Cuts and Jobs Act to expire. Will the cor- which suggest that the real purpose of the AMS car- poration income tax rate be allowed to return to 35 per- bon tax is to fund other policy priorities. That is the cent? Apart from the artificial imperatives of making deeper implication of the AMS failure to examine its the 10-year budget numbers consistent with the con- carbon tax in the context of its purported “climate” straints imposed by the budget process, one reason justification, as discussed above. that the tax cuts were made “temporary” was political: The Republicans want to force the Democrats to vote A Carbon Tax as an Efficient “Market” Policy on tax reductions repeatedly. and the Tax/Regulation Trade. AMS and a number The choice between a current law and a current of other carbon tax proponents argue that a carbon policy perspective for policy analysis is highly sub- tax is an efficient policy because it allows individuals jective; neither is obviously correct in any given con- and firms to reduce GHG emissions in whatever ways text. In my view, a “current policy” assumption is they find least costly, unlike a “command and con- more realistic for examination of the AMS proposal trol” regulatory approach that mandates across-the- because the tax provisions favored by AMS will not board GHG reductions and specific technological be allowed to expire, with or without a carbon tax. fixes. I address this “efficiency” assertion below, but This means that a substantial new source of revenue for now let us address the AMS claim that its carbon will be needed to avoid a large increase in the bud- tax is a “market” policy. get deficit, and so it is reasonable to hypothesize that That is not correct. The government must choose the actual purpose (or function) of the AMS carbon the tax and thus implicitly the allowable level of tax is to raise revenues to avoid that fiscal outcome in GHG emissions. We have seen already that the AMS the next 10-year budget window, notwithstanding the tax proposal has little to do with any measure of a stated “climate” justification. This observation is con- GHG externality; the level of the tax and the implicit sistent with the following paragraph in the AMS “2018 future emissions of GHG are wholly arbitrary, deter- Year-End Report”: mined by some AMS sense of what is politically fea- sible, the goals for reductions in other taxes, and Pressure to address our country’s long-term fis- estimates of the revenues needed to achieve “reve- cal issues also grew. The Congressional Budget nue neutrality.” Office reported that the deficit during the first two There is nothing “market”-driven by any of this. months of fiscal year 2018 was 50% higher than it Accordingly, the AMS promotion of its carbon tax as a was during the same period the previous year. And “market solution” to “one of America’s most pressing the national debt is expected to reach $22 trillion by economic challenges” (“reducing carbon pollution”) early 2019. Fiscally conservative Republicans, whose is unsupported by the specifics of its actual proposal concerns about the federal deficit appeared to have and underlying analyses. been lost in recent years, started to seriously evalu- As just noted, AMS argues—with the support of ate long-term spending and revenue issues. The lack many economists—that a tax on emissions would of other politically acceptable, multi-trillion-dollar reduce the overall cost of achieving given emissions revenue options forced some conservatives who are cuts below the cost that would obtain under such usually unwilling to consider any new form of taxes command and control regulations as equipment to quietly contemplate a carbon tax.68 mandates, because emitters would be able to choose the least costly means of achieving emissions reduc- Again, AMS is assuming that imposition of a car- tions in the face of the tax. Accordingly, the tax leads bon tax would not increase the political demands for the market to achieve a given aggregate reduction in

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emissions at a total cost lower than that yielded by the It might be the case that regulators too have incen- regulatory approach, because regulators cannot know tives to choose emissions goals that are too stringent, the specific conditions characterizing each industrial if doing so is consistent with the larger goal of max- plant and are likely to have few incentives to discover imizing their budgets (or discretionary budgets) and them in any event.69 because overly stringent regulations may serve an The central problem with that argument is straight- ideological agenda.72 But if Congress must approve forward: The emissions goal is not fixed or exogenous. or has the power to repeal given regulations, there Instead, it must be chosen. “Efficiency” requires both are strong reasons to believe that a tax approach an efficient emissions goal that equates the marginal might prove less efficient overall than the regula- benefits and costs of emissions reductions and tools tory approach. The “efficient” tax rate is something to achieve that amount of reductions that minimize approximating the marginal social cost of GHG (“car- the cost of doing so. bon”), with perhaps some downward adjustment for Once government derives revenues from a system the deadweight economic costs (“excess burden”) of carbon taxes, with ensuing political competition for imposed by the tax system upon the economy.73 That those revenues, it is not difficult to predict that under is not the same as the revenue-maximizing tax rate, a broad range of conditions the emissions reduction and democratic political institutions can be predicted goal will be inefficiently stringent—that is, the tax to opt for the latter under a broad range of conditions. rate will be too high in the sense that the marginal Accordingly, it is far from clear that Congress costs of emissions cuts will exceed the marginal bene- would choose a carbon tax rate reflecting the mar- fits. This is particularly the case if we assume, reason- ginal “uninternalized” social cost of GHG emissions, ably, that policymakers have time horizons shortened to be distinguished sharply from the tax rate than by the imperatives of the next election; the implicit maximizes the present value of the revenue stream.74 use of a discount rate too high will yield a preference This outcome under political competition shaped by for increased revenues in the short run at the expense democratic institutions depends on the nature of the of lower revenues over the longer run.70 majority coalition emerging in Congress. But it is rea- In other words, “revenue maximization” means sonable to assume that the interest groups bearing the the present value of the revenue stream over some burden of the carbon tax would be unconcentrated, time horizon—that is, at some discount rate. Accord- again because some substantial part of the impacts of ingly, the tax rate that maximizes revenues over a the tax would be hidden in the prices of myriad goods short period is higher than that maximizing revenues and services. The groups receiving the benefits of the over the long run, due to the greater ability of market new revenues in the form of spending approved by a participants to find ways to avoid the tax given more congressional majority coalition are much more likely time to do so, in particular when the tax rate is higher to be concentrated interests.75 rather than lower.71 Because the marginal members of That is different from the political dynamic under the congressional majority are likely to be the incum- the regulatory approach: The regulated industries and bents in greatest danger of defeat in the next election, the regulators (i.e., the bureaucracy) are concentrated it is not difficult to predict that the political equilib- interests, but the beneficiaries of reduced emissions to rium for a carbon tax will be a rate maximizing rev- a substantial degree are the diffused population writ enues over a time period shorter rather than longer, large.76 Accordingly, even if the tax is more “efficient” precisely because for those marginal members of the in terms of allowing a cost-minimizing set of actions to majority, the time horizon is the next election, and reduce emissions, it is not clear that that effect would the political benefits of greater spending are more or outweigh the possible inefficiency inherent in a sys- less immediate. This is particularly the case given that tem of carbon taxes in which important interests drive the burdens of the carbon tax would be hidden in the a political equilibrium in which the tax rate is chosen prices of myriad goods and services. to maximize the revenue stream rather than to yield

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the efficient level of emissions. The traditional “regu- vehicle “efficiency” (mileage) requirements.82 And latory capture” literature does not tell us whether the the Trump administration has begun the process of “capture” of the regulators by the regulated industry exiting the Paris GHG emissions agreement (but not yields regulations too stringent or insufficiently so.77 the overall United Nations Framework Convention After all, the regulators, abstracting from the capture on Climate Change).83 dimension, might have incentives to make the regula- tions too stringent, perhaps as a way to increase their Republican Support for a Carbon Tax. In its budgets, so that “capture” might yield regulations “2018 Year-End Report,” AMS attempts to describe more efficient.78 Alternatively, the “capture” model growing Republican support for climate policy gener- might yield an equilibrium outcome in a regulator/ ally and a carbon tax in particular: regulated bargaining process in which the regulations have the effect of cartelizing the industry, so that emis- At the beginning of the year, when President Trump sions might be inefficiently low.79 denied the existence of climate change and prom- The AMS assumption that there would be wide- ised to roll back environmental regulations, some spread support for a wholesale elimination of the thought it would reduce the pressure on Republi- GHG regulatory regime in exchange for a carbon can members of Congress to address climate change. tax is unconvincing. Narrowly, the environmental However, for some of them, particularly those who left opposes this trade-off because the regulations privately acknowledge the existence of the issue, it enhance their political power greatly, particularly in caused them to begin contemplating non-regulatory terms of their ability to use litigation to delay proj- approaches to address it. The Alliance, therefore, ects and to elicit various forms of payoffs from regu- spent the beginning of the year meeting with Repub- lated industries.80 More generally the Democrats in lican members of Congress to help them consider a the main would be more likely to oppose it because carbon tax in lieu of regulations. By mid-year, Repub- the congressional bargaining process over the use of lican members of Congress were reconsidering their the carbon tax revenues would be driven heavily by opposition to a carbon tax, enough, in fact, that leg- demands from the losers for various forms of com- islation introduced by Republican Whip Steve Scalise pensation, as discussed above. Because the losers dis- (R-La.) opposing a carbon tax failed to gain unani- proportionately would be red states (because they mous Republican support. More importantly, within disproportionately are consumers and producers of a few days a small group of Republican members of conventional energy), such compensation dispropor- Congress introduced legislation to impose a carbon tionately would flow to red states, particularly under tax—the first Republican climate change legislation a 60-vote requirement in the Senate. The regulatory in a decade.84 regime is likely to preserve more of the wealth trans- fer benefits for blue states, in that the higher energy This is puzzling. AMS supports this assertion of costs would adversely affect red states and their eco- growing Republican support for its policy stance by nomic competitiveness disproportionately.81 pointing out that Republican opposition is not unani- Accordingly, it is not clear that the AMS swap of mous, an observation that does not support the larger a carbon tax in place of the GHG regulatory regime proposition. Republicans in Congress would vote would prove a political equilibrium. Moreover, the overwhelmingly against any such policies, in partic- implicit AMS premise that a carbon tax is needed ular because in their essentials such policies would politically to roll back the GHG regulatory regime increase energy costs, engendering a crude wealth begun by the Obama administration has been dis- transfer from red states to blues ones. (Again, red proved: The Trump administration is using that state energy consumption and production, crudely, very same regulatory process to eliminate the Clean are substantially more GHG-intensive than those of Power Plan and to weaken significantly the motor blue states.) More broadly, it is difficult to envision

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a willingness on the part of Republicans, or Demo- A second argument might be that a carbon tax crats, to vote to increase energy costs for every family would engender an incentive to invest in innova- and business so that the recent cut in the corporation tions reducing the cost of limiting GHG emissions. income tax can be preserved, whatever one believes But, again, the small temperature effects of such about the economic “efficiency” of such a policy. That prospective innovations are striking: Were US emis- easy-to-understand increase in energy costs in a sions reduced by 60 percent, the maximum tempera- nutshell is why two carbon tax proposals in Wash- ture reduction in 2100 would be less than a tenth of ington state—hardly a Republican stronghold—in a degree. If such innovations were adopted by the 2016 and 2018, respectively revenue-neutral and not, entire industrialized world, the effect would be less were defeated soundly, by nearly 60–40.85 Does AMS than a quarter of a degree.89 believe that the outcome would have been reversed Moreover, such innovation is not costless, and the were the electorate Republican? tax would destroy some part of the economic value of the existing resource base and capital stock. Accord- ingly, the innovation argument is not far removed Concluding Observations from the standard broken windows fallacy: A reduc- tion in wealth can be wealth enhancing. Even if we It is possible that the AMS proposal is driven in part accept the argument that GHG emissions create by rationales and assumptions not stated explicitly in important negative environmental impacts, the trivial the various AMS promotional materials and research improvements yielded by any plausible tax are incon- papers. One such argument might be that enactment sistent with the “innovation” rationale. of a carbon tax by the US would facilitate an inter- A third argument might be that enactment now national effort to reduce GHG emissions or perhaps of a moderate carbon tax would begin the process of might engender US “leadership” on the issue. This implementing a US GHG policy, which then could possible argument is not consistent with the specif- be strengthened over time. This rationale confronts ics of the international agreement finally reached in the same benefit/cost problem: Seemingly “strong” Paris in late 2015, after about 20 years of international policies would have small effects at most. And at a negotiations, publicity, declarations of a looming cri- political level, the demonstrated refusal by several sis, and political pressures. The GHG emission reduc- Congresses to enact policies yielding even small GHG tions incorporated in the Paris agreement were the reductions does not bode well for the realism of this simple sum of the promises specified in the “Intended possible justification. National Contributions” offered by each of the The AMS proposal for a carbon tax, ostensibly nations participating.86 Even if taken at face value, the designed to address a purported climate crisis in a temperature effect of the agreement in 2100 would more efficient way than a regulatory approach, in real- be 0.17°C, barely more than the standard deviation ity is independent of an actual quantification of cli- (0.11°C) of the surface temperature record.87 mate phenomena or of a climate externality. Instead, it Consider a highly aggressive and thus implausible is a proposal designed to raise revenues to offset those international effort to reduce GHG emissions: a 27 lost with the extension of various tax reductions and percent reduction by the US by 2025 and by 2030 a other policies supported by AMS, under a current law 20 percent cut by China, a 30 percent cut by the rest orientation rather than a current policy orientation, of the industrialized world, and a 20 percent cut by despite the reality that the latter is more realistic. the rest of the developing world. The temperature The AMS claim to be driven by “science” is incon- effect would be about half a degree by 2100.88 The sistent with its uncritical adoption of the assumptions upshot of this reality is that the international facilita- and conclusions of two recent reports, one from IPCC tion or leadership argument for a carbon tax would be and the other from the federal government, both of exceedingly weak. which are deeply flawed, and AMS presents no climate

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analysis of its proposal in its materials. The implicit threatened in the next election. That dynamic would AMS definition of tax “efficiency” is problematic, in be reinforced by the reality that the costs of the car- that it assumes that the size and composition of the bon tax would be hidden in the prices of myriad goods government budget are independent of the tax instru- and services. As with the tax/budget nexus, the emis- ments chosen to fund it. The AMS revenue-neutrality sions goal is not independent of the policy tool cho- pledge would be unlikely to be fulfilled, as a carbon sen to achieve it. The AMS assumption that a carbon tax in a congressional bargaining equilibrium would tax coupled with an elimination of the regulatory be packaged with significant new spending compen- regime would be politically viable is dubious, as is the sating the losers, and perhaps other interests compet- AMS assertion of substantial prospective Republican ing for shares of the revenues. support for climate policy generally and a carbon tax AMS seems to recognize this explicitly. Because a in particular. carbon tax, and thus the intended reduction in GHG The AMS carbon tax would not achieve its stated emissions, must be chosen by government, it is not a environmental goals, would not be “revenue neutral,” “market” policy. Notwithstanding the view of many and would not prove more efficient economically economists, it is likely to prove less efficient econom- than a regulatory regime. It should be rejected. ically than a regulatory approach because the reve- nue stream would induce policymakers to choose the tax rate maximizing revenues rather than optimiz- About the Author ing emissions, an outcome made more likely by the prospect that the marginal members of the congres- Benjamin Zycher is a resident scholar at the Ameri- sional majority in this context would be those most can Enterprise Institute.

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Notes

1. Alliance for Market Solutions, “AMS Statement on Introduction of Carbon Tax Legislation,” press release, July 23, 2018, https:// amsresearch.org/wp-content/uploads/2018/11/AMS_Press-Release_4.pdf. 2. Alliance for Market Solutions, “Who We Are,” https://amsresearch.org/about/. 3. Alliance for Market Solutions, “Who We Are”; and Alliance for Market Solutions, “Press Releases and Articles,” https:// amsresearch.org/news/. 4. Alliance for Market Solutions, “2018 Year-End Report,” October 13, 2017. 5. See Benjamin Zycher, “The Climate Empire Strikes Out: The Perils of Policy Analysis in an Echo Chamber,” American Enterprise Institute, September 2018, https://www.aei.org/wp-content/uploads/2018/09/The-climate-empire-strikes-out-the-perils-of-policy- analysis-in-an-echo-chamber.pdf; and Judith Curry, “Why I Don’t ‘Believe’ in ‘Science,’” Climate Etc., March 26, 2019, https:// judithcurry.com/2019/03/26/why-i-dont-believe-in-science/. 6. Lisa V. Alexander et al., “Summary for Policymakers,” in Climate Change 2013: The Physical Science Basis, edited by Thomas F. Stocker et al. (Cambridge, UK: Cambridge University Press, 2013), http://www.climatechange2013.org/images/report/WG1AR5_SPM_ FINAL.pdf. 7. See Nicholas Lewis and Judith Curry, “The Impact of Recent Forcing and Ocean Uptake Data on Estimates of Climate Sensitiv- ity,” Journal of Climate 31, no. 15 (August 2018): 6051–71, https://journals.ametsoc.org/doi/abs/10.1175/JCLI-D-17-0667.1; John R. Christy and Richard T. McNider, “Satellite Bulk Tropospheric Temperatures as a Metric for Climate Sensitivity,” Asia-Pacific Journal of Atmo- spheric Science 53, no. 4 (2017): 511–18, https://wattsupwiththat.files.wordpress.com/2017/11/2017_christy_mcnider-1.pdf; Ross McKitrick and John Christy, “A Test of the Tropical 200- to 300-hPa Warming Rate in Climate Models,” Earth and Space Science 5 (2018), https://agupubs.onlinelibrary.wiley.com/doi/full/10.1029/2018EA000401; and Patrick J. Michaels, “At What Cost? Examining the Social Cost of Carbon,” statement before the Subcommittee on Environment and Subcommittee on Oversight, Committee on Science, Space, and Technology, US House of Representatives, February 28, 2017, https://www.cato.org/publications/testimony/ what-cost-examining-social-cost-carbon. For a summary chart of the findings on ECS in the recent peer-reviewed literature, see Patrick Michaels and Ryan Maue, “Equilibrium Climate Sensitivity,” Globalwarming.org, http://www.globalwarming.org/wp-content/ uploads/2019/03/Michaels-Maue-Sensitivity-Chart-1.jpg. 8. Alliance for Market Solutions, “AMS Statement on Introduction of Carbon Tax Legislation.” 9. Alliance for Market Solutions, “2018 Year-End Report,” October 13, 2017. 10. Valerie Masson-Delmotte et al., Global Warming of 1.5°C, Intergovernmental Panel on Climate Change, https://report.ipcc.ch/ sr15/pdf/sr15_spm_final.pdf. 11. US Global Change Research Program, Fourth National Climate Assessment, vol. 2, Impacts, risks, and Adaptation in the United States, 2018, https://nca2018.globalchange.gov/. 12. See Benjamin Zycher, “Hearken Sinners: The End Is Near,” American Enterprise Institute, October 22, 2018, http://www.aei.org/ publication/hearken-sinners-the-end-is-near/. 13. Scott Nystrom, Katie O’Hare, and Ken Ditzel, “The Economic, Fiscal, and Emissions Impacts of a Revenue-Neutral Carbon Tax,” FTI Consulting, July 2018, https://amsresearch.org/wp-content/uploads/2018/11/AMS_FTI-Consulting-Report_Full-Report.pdf. 14. EY, “Carbon Regulations vs. a Carbon Tax: A Comparison of the Macroeconomic Impacts,” October 2018, https://www. ourenergypolicy.org/wp-content/uploads/2018/11/AMS_EY-Report_FINAL-100118-1.pdf. 15. Scott Ganz and Alex Brill, “The Political Economy of a Carbon Tax: A County-by-County Investigation,” Alliance for Market Solutions, January 2018, https://amsresearch.org/wp-content/uploads/2018/01/AMS_Polical-Economy-of-a-Carbon-Tax_Brill-Ganz. pdf. 16. See Benjamin Zycher, “The Social Cost of Carbon, Greenhouse Gas Policies, and Politicized Benefit/Cost Analysis,”Texas A&M Law Review 6, no. 1 (2018): 59–76, https://scholarship.law.tamu.edu/cgi/viewcontent.cgi?article=1154&context=lawreview; and Robert S.

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Pindyck, “Climate Change Policy: What Do the Models Tell Us?,” Journal of Economic Literature 51, no. 3 (September 2013): 860–72. See also Interagency Working Group on Social Cost of Greenhouse Gases, “Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866,” August 2016, https://obamawhitehouse.archives. gov/sites/default/files/omb/inforeg/scc_tsd_final_clean_8_26_16.pdf; and Executive Office of the President, “The President’s Climate Action Plan,” June 2013, https://obamawhitehouse.archives.gov/sites/default/files/image/president27sclimateactionplan.pdf. 17. See University Corporation for Atmospheric Research, “Model for the Assessment of Greenhouse-Gas Induced Climate Change: A Regional Climate Scenario Generator,” http://www.cgd.ucar.edu/cas/wigley/magicc/. 18. See J. Hansen et al., “GISS Analysis of Surface Temperature Change,” Journal of Geophysical Research 104, no. D24 (December 27, 1999): 30997–31022, https://agupubs.onlinelibrary.wiley.com/doi/pdf/10.1029/1999JD900835. 19. Alliance for Market Solutions, “2018 Year-End Report,” October 13, 2017, 4. 20. For a description of the Coupled Model Intercomparison Project Phase 5 models, see Program for Climate Model Diagnosis and Intercomparison, “CMIP5—Couples Model Intercomparison Project Phase 5—Overview,” https://cmip.llnl.gov/cmip5/. 21. See John R. Christy, testimony before the Committee on Science, Space, and Technology, US House of Representatives, March 29, 2017, https://www.nsstc.uah.edu/users/john.christy/docs/ChristyJR_Written_170329.pdf. For a summary chart of the CMIP-5 model predictions and the satellite and radiosonde (weather balloon) data, see John Christy, “Global Lower Tropospheric Temperature ºC Centered, 5-Yr Running Averages 1979–2018,” Globalwarming.org, http://www.globalwarming.org/wp-content/uploads/2019/03/ Christy-modeled-versus-observed-global-lower-troposphere-figure-1.png. See also McKitrick and Christy, “A Test of the Tropical 200- to 300-hPa Warming Rate in Climate Models.” 22. Judith Curry, “1.5 Degrees,” Climate Etc., October 8, 2018, https://judithcurry.com/2018/10/08/1-5-degrees/. 23. Intergovernmental Panel on Climate Change, “Working Group I Contribution to the IPCC Fifth Assessment Report Climate Change 2013: The Physical Science Basis,” June 7, 2013, Table 12.4, http://www.climatechange2013.org/images/uploads/WGIAR5_ WGI-12Doc2b_FinalDraft_Chapter12.pdf. 24. For a useful summary discussion of the four IPCC Representative Concentration Pathways, see G. P. Wayne, “The Beginner’s Guide to Representative Concentration Pathways,” Skeptical Science, August 2013, https://www.skepticalscience.com/docs/RCP_ Guide.pdf. For a detailed description of the parameters of RCP8.5, see Keywan Riahi et al., “RCP 8.5—a Scenario of Comparatively High Greenhouse Gas Emissions,” Climate Change 109 (2011): 33–57, https://link.springer.com/article/10.1007/s10584-011-0149-y. See also Judith Curry, “What’s the Worst Case? Emissions/Concentration Scenarios,” Climate Etc., March 28, 2019, https://judithcurry. com/2019/03/28/whats-the-worst-case-emissions-concentration-scenarios/#more-24842; and Judith Curry, “Is RCP8.5 an Impossible Scenario?,” Climate Etc., November 24, 2018, https://judithcurry.com/2018/11/24/is-rcp8-5-an-impossible-scenario/. 25. Masson-Delmotte et al., Global Warming of 1.5°C. 26. See Christopher Shaw, “The Two Degrees Celsius Limit,” Oxford Research Encyclopedia of Climate Science, April 2017, http:// oxfordre.com/climatescience/view/10.1093/acrefore/9780190228620.001.0001/acrefore-9780190228620-e-15. 27. See Zycher “The Climate Empire Strikes Out.” Attainment of the 2°C goal under the higher GHG concentration paths would require emissions cuts impossible to achieve without massive impoverishment of hundreds of millions or billions of people around the globe. 28. See Patrick J. Michaels and Paul C. Knappenberger, Lukewarming: The New Climate Science That Changes Everything, Cato Insti- tute, September 2016, https://store.cato.org/book/lukewarming. 29. For an example, see Kelly Levin, “According to New IPCC Report, the World Is on Track to Exceed Its ‘Carbon Budget’ in 12 Years,” World Resources Institute, October 7, 2018, https://www.wri.org/blog/2018/10/according-new-ipcc-report-world-track-exceed- its-carbon-budget-12-years. 30. See the satellite temperature trends for four atmospheric layers at University of Alabama, Huntsville, “UAH Version 6.0 Global Average Temperature Variations for 4 Atmospheric Layers,” http://www.drroyspencer.com/wp-content/uploads/version6-msu234- global-anomaly-time-series.gif. 31. Patrick J. Michaels, discussion with the author, December 3, 2018. 32. For an example of surface (land/ocean) temperature charts, see East Anglia University, Hadley Climate Research Unit, “Tim

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Osborn: HadCRUT4 Global Temperature Graphs,” February 7, 2019, https://crudata.uea.ac.uk/~timo/diag/tempdiag.htm. 33. See Michael E. Mann, “Little Ice Age,” in Encyclopedia of Global Environmental Change: The Earth System: Physical and Chemical Dimensions of Global Environmental Change, edited by Michael C. MacCracken, John S. Perry, and Ted Mann (Chichester, UK: John Wiley & Sons, 2002), http://www.meteo.psu.edu/holocene/public_html/shared/articles/littleiceage.pdf. 34. See Christy and McNider, “Satellite Bulk Tropospheric Temperatures as a Metric for Climate Sensitivity”; Lewis and Curry, “The Impact of Recent Forcing and Ocean Uptake Data on Estimates of Climate Sensitivity”; and McKitrick and Christy, “A Test of the Trop- ical 200- to 300-hPa Warming Rate in Climate Models.” 35. See the historical data chart from University of Alabama, Huntsville, “Average per Station (1114 USHCN Stations) 1895–2017 Number of Days Daily Maximum Temperature Above 100ºF and 105ºF,” http://www.drroyspencer.com/wp-content/uploads/US- extreme-high-temperatures-1895-2017.jpg. 36. See Judith Curry, “Sea Level and Climate Change,” Climate Forecast Applications Network, November 25, 2018, https://curryja. files.wordpress.com/2018/11/special-report-sea-level-rise3.pdf. See also the conflicting data charts at Judith Curry, “Time Series of GMSL for the Period 1900–2010,” Climate Etc., https://curryja.files.wordpress.com/2018/03/slide031.png; and Judith Curry, “Is CO2 the ‘Control Knob’ for Global Sea Level Rise?,” Climate Etc., https://curryja.files.wordpress.com/2018/06/slide092.png. 37. See Patrick J. Michaels, “Spinning Global Sea Ice,” Cato Institute, February 12, 2015, https://www.cato.org/blog/spinning- global-sea-ice. 38. For historical data charts, see National Oceanographic and Atmospheric Administration, “Historical Records and Trends,” https://www.ncdc.noaa.gov/climate-information/extreme-events/us-tornado-climatology/trends. 39. For historical satellite data charts, see Ryan N. Maue, “2019 Accumulated Cyclone Energy,” PoliciClimate.com, http:// policlimate.com/tropical/. 40. For historical data, see National Interagency Fire Center, “Total Wildland Fires and Acres (1926–2017)," https://www.nifc.gov/ fireInfo/fireInfo_stats_totalFires.html. 41. For historical data chart, see Environmental Protection Agency, “Climate Change Indicators: Drought,” https://www.epa.gov/ climate-indicators/climate-change-indicators-drought. 42. See R. M. Hirsch and K. R. Ryberg, “Has the Magnitude of Floods Across the USA Changed with Global CO2 Levels?,” Hydrological Sciences Journal 57, no. 1 (2012): 1–9, https://www.tandfonline.com/doi/full/10.1080/02626667.2011.621895?scroll=top&needAccess=true. 43. See CO2 Science, Ocean Acidification Database,http://www.co2science.org/data/acidification/results.php ; and Alan Longhurst, Doubt and Certainty in Climate Science, March 2012–September 2015, 214–25, https://curryja.files.wordpress.com/2015/09/ longhurst-print.pdf. 44. See endnote 24. The others are RCP 2.6, 4.5, and 6. The numbers are not temperature effects; they are theoretical calculations of “radiative forcing” impacts in watts per square meter (Wm2) caused by a given GHG concentration scenario by 2100. RCP2.6 (some- times denoted RCP3PD) predicts radiative forcing of 3 Wm2 before 2100, declining to 2.6 Wm2 by 2100. “PD” stands for “peak and decline.” 45. See the CO2 atmospheric concentrations data reported by National Atmospheric and Oceanographic Administration, “Trends in Atmospheric Carbon Dioxide,” https://www.esrl.noaa.gov/gmd/ccgg/trends/data.html. The average was 1.9 ppm for 1985–2017 and 1.6 ppm for 1959 (the earliest year reported by NOAA) through 2017. 46. See the BP projections to 2040 at BP, “Natural Gas,” https://www.bp.com/en/global/corporate/energy-economics/energy- outlook/demand-by-fuel/natural-gas.html; and BP, “Coal,” https://www.bp.com/en/global/corporate/energy-economics/energy- outlook/demand-by-fuel/coal.html. See also the International Energy Agency projections to 2040 at International Energy Agency, “World Energy Outlook,” https://www.iea.org/weo/. 47. See Riahi et al., “RCP 8.5—a Scenario of Comparatively High Greenhouse Gas Emissions.” 48. See Wayne, “The Beginner’s Guide to Representative Concentration Pathways.” 49. Christy, “Global Lower Tropospheric Temperature ºC Centered, 5-Yr Running Averages 1979–2018.” For a discussion of the pol- icy implications of the four RCPs, see Zycher, “The Climate Empire Strikes Out.” 50. See Matthew Collins et al., “Long-Term Climate Change: Projections, Commitments and Irreversibility,” IPCC Fifth Assessment

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Report, in Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Inter- governmental Panel on Climate Change, edited by T. F. Stocker et al. (Cambridge, UK: Cambridge University), 1031, https://www.ipcc.ch/ site/assets/uploads/2018/02/WG1AR5_Chapter12_FINAL.pdf. 51. See Cato Institute, “Patrick J. Michaels,” https://www.cato.org/people/patrick-michaels. 52. See Patrick J. Michaels, “Comments on the Fourth National Climate Assessment,” Cato Institute, https://object.cato.org/sites/ cato.org/files/pubs/pdf/pat-michaels-national-climate-assessment.pdf. 53. See Climate Workshop, “Russian Institute for Numerical Mathematics Climate Model Version 4,” http://www.glisaclimate.org/ node/2220. In the chart at the following link, the thin purple line is the forecast trend from INM-CM4: Globalwarming.org, “5-Year Running Mean of Tropical Temperature,” http://www.globalwarming.org/wp-content/uploads/2019/03/Christy-modeled-versus- observed-temperatures-in-tropical-atmosphere-ppt-figure-2.jpg. 54. This outcome requires an assumption of competitive markets and the presence of transaction costs that prevent bargaining from internalizing the externality, in the form of payment offers. The resource use in the sector that is “too large” is “excessive” only in the context of individual preferences, such that an increase in the value of aggregate output could be effected through the normative pre- scription that government adopt policies leading to a reduction in the output of the given sector (or a reduction in the use of inputs yielding the external effect). The public choice problem can be summarized as the issue of whether government under any given set of institutional arrangements has incentives (and the information) to adopt such policies. 55. See Interagency Working Group on Social Cost of Greenhouse Gases, “Technical Support Document.” 56. See Nystrom, O’Hare, and Ditzel, “The Economic, Fiscal, and Emissions Impacts of a Revenue-Neutral Carbon Tax.” 57. See EY, “Carbon Regulations vs. a Carbon Tax.” 58. See Ganz and Brill, “The Political Economy of a Carbon Tax.” 59. See US Environmental Protection Agency, “Regulatory Impact Analysis for the Clean Power Plan Final Rule,” August 2015, ES21–ES23, https://www3.epa.gov/ttnecas1/docs/ria/utilities_ria_final-clean-power-plan-existing-units_2015-08.pdf. For a description of the analytic flaws in the Obama administration estimates of the benefits of reductions in particulate emissions, see Steve Milloy, “Will the Trump Fuel Economy Reform Proposal Create Deadly Air Pollution?,” Competitive Enterprise Institute, October 17, 2018, https://cei.org/sites/default/files/Steve_Milloy_-_Will_CAFE_Reform_Proposal_Create_Deadly_Air_Pollution%20%281%29.pdf. 60. National Primary and Secondary Ambient Air Quality Standards, 42 USC § 7409, https://www.law.cornell.edu/uscode/text/42/7409. 61. See Nystrom, O’Hare, and Ditzel, “The Economic, Fiscal, and Emissions Impacts of a Revenue-Neutral Carbon Tax,” ES Figure 1. 62. See Alan Viard, “A Deeper Look at New Wealth Tax Proposal from Elizabeth Warren,” Hill, January 28, 2019, https://thehill.com/ opinion/finance/427218-a-deeper-look-at-new-wealth-tax-proposal-from-elizabeth-warren. 63. See, e.g., Casey B. Mulligan, “Economics 203: Derivation of Ramsey’s Optimal Tax Formula,” University of Chicago, Department of Economics, Fall 2007, http://home.uchicago.edu/cbm4/econ260/E203rams.pdf. I shunt aside here the issue of how government can estimate the relevant elasticities and also the question of what incentives would drive government toward that allocation of tax prices. See Randall G. Holcombe, “The Ramsey Rule Reconsidered,” Public Finance Review 30, no. 6 (November 2002): 562–78, https:// journals.sagepub.com/doi/abs/10.1177/109114202238003. 64. See Geoffrey Brennan and James M. Buchanan,The Power to Tax: Analytical Foundations of a Fiscal Constitution (New York: Cambridge University Press, 1980), 55–82. 65. See James M. Buchanan, Public Finance in Democratic Process (Chapel Hill, NC: University of North Carolina Press, 1967), 11–57, 88–97, and 126–43. 66. See, for example, David Byler, “How Trump Did (and Didn’t) Reshape the Electoral Map,” RealClearPolitics, November 18, 2016, http://www.realclearpolitics.com/articles/2016/11/18/how_trump_did_and_didnt_reshape_the_electoral_map__132385.html. 67. This provision is about $98 billion over a 10-year period in the FTI analysis. See Nystrom, O’Hare, and Ditzel, “The Economic, Fiscal, and Emissions Impacts of a Revenue-Neutral Carbon Tax,” ES Figure 1. 68. Alliance for Market Solutions, “2018 Year-End Report.” 69. See Robert W. Crandall, “Pollution Controls,” in The Concise Encyclopedia of Economics, edited by David R. Henderson (Carmel, IN: Liberty Fund, 2007), http://www.econlib.org/library/Enc/PollutionControls.html; and Bryan Caplan, “Externalities,” in The Concise

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Encyclopedia of Economics, http://www.econlib.org/library/Enc/Externalities.html. 70. I ignore here the impact of the incentives shaping the behavior of the political parties, which are long-lived institutions. This is a topic well outside the scope of the discussion here. 71. This is the standard axiom that demand and supply elasticities grow over time as market participants increasingly find ways to adjust to changes in market conditions, in this case the imposition of a carbon tax. 72. See, e.g., William A. Niskanen, “Bureaucrats and Politicians,” Journal of Law and Economics 18, no. 3 (December 1975): 617–43. 73. See Ross McKitrick, Economic Analysis of Environmental Policy (Toronto: University of Toronto Press, 2011), 169–90. 74. The “uninternalized” part of a social cost or benefit is that part not reflected in market prices, so that market participants are confronted with inefficiently weak incentives to take account of those impacts on third parties. 75. See, e.g., Mancur Olson Jr., The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge, UK: Harvard Uni- versity Press, 1971), 53–65. 76. Note that the regulated industries might have incentives to support a regulatory structure more stringent than otherwise might be the case if there are scale economies in adherence to the regulations, as a means of making entry by smaller new competitors more difficult. 77. See George J. Stigler, “The Theory of Economic Regulation,” Bell Journal of Economics and Management 2, no. 1 (Spring 1971): 3–21. 78. See Niskanen, “Bureaucrats and Politicians.” 79. See, e.g., Bruce Yandle, “Public Choice and the Environment,” in The Elgar Companion to Public Choice, edited by William F. Shughart II and Laura Razzolini (Northampton, MA: Edward Elgar, 2001), 590–610. 80. See Benjamin Zycher, “Reforming U.S. Environmental Policy,” Law & Liberty, October 1, 2018, https://www.lawliberty.org/liberty- forum/reforming-u-s-environmental-policy/; and Benjamin Zycher, “Environmental Policy: Benjamin Zycher Responds to His Critics,” Law & Liberty, November 9, 2018, https://www.lawliberty.org/liberty-forum/environmental-policy-benjamin-zycher-responds-to- his-critics/. 81. Ganz and Brill argue that this effect would be much smaller than commonly assumed under an assumption that the AMS carbon tax would be accompanied by a reduction in the taxation of wage income. For the reasons discussed above, I view this outcome as implausible politically, and their analysis ignores the wage and employment implications of higher energy costs. See Ganz and Brill, “The Political Economy of a Carbon Tax.” 82. The courts had blocked implementation of the CPP, as its reliance on section 111(d) of the Clean Air Act almost certainly violated the law. See Marlo Lewis, “Comments of the Competitive Enterprise Institute,” Re: Docket ID No. EPA-HQ-OAR-2017-0355, https://cei. org/sites/default/files/MarloLewisCompetitiveEnterpriseInstituteCommentLetterACERuleDocketIDNoEPAHQOAR.pdf. California’s claim to have a waiver power for mileage standards under the Energy Policy and Conservation Act is inconsistent with explicit lan- guage in that law. See US Environmental Protection Agency, “Proposal: Affordable Clean Energy (ACE) Rule,” August 21, 2018,https:// www.epa.gov/stationary-sources-air-pollution/proposal-affordable-clean-energy-ace-rule; Marlo Lewis, “CEI Comments on EPA ACE Rule,” Competitive Enterprise Institute, October 31, 2018, https://cei.org/content/cei-comments-epa-ace-rule; Marlo Lewis, “EPA Regulation of Fuel Economy: Congressional Intent or Climate Coup?,” Engage 12, no. 3 (November 2011): 36–46, https://cei.org/sites/ default/files/Marlo%20Lewis%20-%20EPA%20Regulation%20of%20Fuel%20Economy%20-%20Congressional%20Intent%20or%20 Climate%20Coup.pdf; and US Environmental Protection Agency, “The Safer Affordable Fuel Efficient (SAFE) Vehicles Proposed Rule for Model Years 2021–2026,” https://www.epa.gov/regulations-emissions-vehicles-and-engines/safer-affordable-fuel-efficient-safe- vehicles-proposed. 83. See White House, “Statement by President Trump on the Paris Climate Accord,” June 1, 2017, https://www.whitehouse.gov/ briefings-statements/statement-president-trump-paris-climate-accord/; Zycher, “The Climate Empire Strikes Out”; Benjamin Zycher, “The Absurdity That Is the Paris Climate Agreement,” American Enterprise Institute, May 25, 2017, http://www.aei.org/publication/the- absurdity-that-is-the-paris-climate-agreement/; and Benjamin Zycher, “The Paris Agreement and the Costly Pursuit of the Trivial,” American Enterprise Institute, April 29, 2019, http://www.aei.org/publication/the-paris-agreement-and-the-costly-pursuit-of-the-trivial/. 84. Alliance for Market Solutions, “2018 Year-End Report,” October 13, 2017.

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85. See Benjamin Zycher, “Washington State Initiative 732: All Cost, No Benefit,” InsideSources, October 18, 2016, https://www. insidesources.com/washington-state-initiative-732-all-cost-no-benefit/; and Benjamin Zycher, “A Washington State Carbon Tax: All Pain, No Gain,” National Review, February 1, 2018, https://www.nationalreview.com/2018/02/washington-carbon-tax-pointless- counterproductive/. 86. See Benjamin Zycher, “The Paris Agreement and the Costly Pursuit of the Trivial,” American Enterprise Institute, April 29, 2019, at http://www.aei.org/publication/the-paris-agreement-and-the-costly-pursuit-of-the-trivial/. 87. Author’s computations using “Model for the Assessment of Greenhouse-Gas Induced Climate Change: A Regional Climate Scenario Generator.” 88. Author’s computations using “Model for the Assessment of Greenhouse-Gas Induced Climate Change.” 89. Author’s computations using “Model for the Assessment of Greenhouse-Gas Induced Climate Change.”

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