Free Lunch, Carbon Tax Edition

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A Carbon Tax at the Pump

A Carbon Tax at the Pump

This morning (June 28, 2013) on NPR’s “Morning Edition” reporter David Kestenbaum interviewed Henry Jacoby, “an economist at MIT’s business school.”  Prof. Jacoby, along with his colleague John Reilly, believe they have discovered a free lunch (although they don’t call it that). I’ll call this a free lunch, carbon tax edition.

[Kestenbaum] And lowering income taxes stimulates the economy — enough, Reilly says, that you could offset the drag from higher energy costs.  [Reilly speaking] ‘This is almost magic, right, because in some of the work we’ve done the whole economy actually benefits by that tax swap[?]. You raise the carbon tax, that raises energy costs, but you actually improve economic performance by reducing other taxes. The economy is actually better off.’ … 

Yet Another Carbon Tax Proposal

Their proposal includes a carbon tax that gradually rises from $0.25 per gallon of gas in the first year to $1 per gallon in 2050.  To offset the negative effects on the economy, Profs. Jacoby and Reilly would do something economists all agree with: figure out a way to give the revenue back to the taxpayers, probably via a cut in income tax rates.  Here’s where the conversation goes next: 

For the moment, I’ll ignore the redistribution problems with this plan.  And I’ll even agree that cutting income taxes stimulates the economy.  But what about the tax increase?  If implemented as described, net tax revenue will be zero — and that is also exactly the size of the net tax cut.  And a net tax cut of zero has zero impact on the economy, no matter what size tax multiplier you apply.

A second issue the two ignore is redistribution.  In order to make this scheme welfare-neutral, it has to be true that spending patterns are not affected by the income tax cuts.  That means each household should receive tax benefits that equal the amount they are paying in carbon taxes.  Otherwise the distribution of income and spending will change.  The scheme will no longer be welfare neutral, meaning the economy will be harmed in economic welfare terms.

Finally there is the issue of timing.  Raising the tax to $1 per gallon by 2050 will be too little and way, way too late. If their goal is controlling CO2 emissions, they should propose something much more drastic and immediate.  Atmospheric CO2 is already over 400 ppm.  We were told that 350 ppm was a serious tipping point.  If you believe in anthropogenic global warming (AGW), then the Jacoby – Reilly proposal probably is causing you to laugh out loud (LOL).

Once again, there is no free lunch.  TANSTAAFL. (There ain’t no such thing as a free lunch.)

A Note on NPR’s Morning Edition

A “transcript” of the show is available at http://www.npr.org/blogs/money/2013/06/28/196355493/economists-have-a-one-page-solution-to-climate-change. However, much of what I’ve quoted above is not included in their transcript.  I did the transcription from the audio version of the show.  Yet another bit of NPR dishonesty.  If you’re going to include a link that says “See full story” it should be the actual full story, not some editor’s idea of what was important.  You are welcome to download my version of the transcript (pdf file).

Conclusion

I have a B.S. from M.I.T. in chemical engineering.  In the past I have occasionally regretted not switching majors to economics.  But after seeing some of the things being said by M.I.T. economists (both Ph.D. graduates of the program and professors), I’m happy I stuck to engineering.  At least us folks can still add and subtract.