https://mises.org/wire/why-prominent-economist-abandoned-his-support-carbon-taxes

Robert P. Murphy

David R. Henderson is a research fellow with the Hoover Institution and was a professor at the Naval Postgraduate School in Monterey, California who taught courses on energy economics. He originally endorsed the standard view among economists that if some physical scientists are right that greenhouse gas emissions will lead to substantial warming, and if the government must “do something,” then the best policy response is a tax on carbon.

However, as Henderson explains in a recent article, he has since changed his mind, and no longer thinks a carbon tax is “a slam dunk.” Even if we stipulate the basic framework of the “market failure” argument, it’s not at all clear that academics and policy wonks should be agitating for a carbon tax. There might be much better solutions available, rather than having the government penalize carbon dioxide emissions.

In the present post I’ll review Henderson’s reasons for his change, and I’ll also address some of the objections that his critics raised against his essay.

Henderson on the Phrase “Price on Carbon”

Before diving into his more substantive points, let me relay Henderson’s discussion of the odd phrase “price on carbon” which you frequently hear in these debates:

Let’s first dispose of … the idea that taxing carbon is the same thing as “pricing carbon.” Carbon is already priced. Natural gas, oil, and coal all have prices and their prices are somewhat related to the amount of carbon they contain. To be sure, adding a tax to carbon would raise the prices of all those fuels, just as adding a tax to alcohol would make your tipple more expensive. But just as setting a tax on alcohol does not “price alcohol,” setting a tax on carbon does not “price carbon.” In my more cynical moments, I wonder if advocates of a carbon tax sometimes call such a tax a price to mislead people into thinking that a carbon tax is a market solution rather than a tax solution. [Bold added.]

Henderson here hits the nail on the head. Besides just being wrong, to equate a carbon tax with a “price on carbon” would sound ludicrous in the context of any other tax.

Henderson Changes His Mind on a Carbon Tax

After summarizing the textbook case for using a Pigovian (named after A.C. Pigou) tax as the least-cost, decentralized way to correct the “negative externality” of human carbon dioxide emissions — an approach that is endorsed by even conservative/libertarian Republican economists such as Greg Mankiw, George Shultz, and John Cochrane — Henderson explains why he now has serious doubts:

[E]conomists who advocate Pigovian taxes take as given that the most-efficient way to forestall global warming is to reduce the amount of carbon used. But what if their assumption is incorrect?

There are at least three important reasons to conclude that the assumption is wrong. First, cow farts. … A far more potent greenhouse gas than carbon dioxide is methane. Methane … warms the planet much more quickly than carbon dioxide before decaying to carbon dioxide. …To be sure, the CO₂ lasts much, much longer than methane, but the fact of methane’s huge short-run potency surely suggests that a tax on carbon may not be the cheapest way to forestall global warming.

Second, one important technological development over the last decade has been “geo-engineering.” The idea here is to change other things in the atmosphere that are easier to change than the amount of carbon used …

Is such a technology feasible right now? Maybe not. But if it were, it would be incredibly cheap. Myhrvold’s organization, Intellectual Ventures, estimated that it could be set up in two years for $20 million and an annual operating cost of about $10 million.

…The third low-cost way to rein in global warming is by planting trees. Trees absorb and store CO₂ emissions. You could call the tree-planting strategy geo-engineering, but it would count as such in a very low-tech form. According to a July 4, 2019 article in The Guardian, planting one trillion trees would be much cheaper than a carbon tax and much more effective. At an estimated cost of 30 cents per additional tree, the overall cost would be $300 billion. That’s large, but it’s a one-time cost. [Bold added.]

To summarize, the specific change in Henderson’s thinking is that he has come to realize that even if we thought the government should “do something” about climate change, it’s not obvious that the correct policy is to induce businesses and households to reduce their carbon dioxide emissions. That mentality is usually taken for granted in the Pigovian framing of the climate change debate, but — as Henderson explains — there are several reasons he now thinks that perhaps this assumption is itself wrong. To repeat, even if one stipulates (if only for the sake of argument) that the government should do something to avert the climate change that human activity will cause (if left unchecked), there might be more sensible policies than to tackle carbon dioxide emissions directly.

I have written on some of these themes here at IER, for example when I explained geo-engineering options to college students who wanted humanity to “do something” about the threat of climate change, and when I recently used the new tree-planting study to illustrate Ronald Coase’s famous critique of the entire Pigovian tax framework for fixing ostensible “market failures.” Note too that a huge advantage of planting trees is that they are a “geo-engineering” approach that has few of the downsides of more radical proposals; it would be hard for critics to object that planting trees will hurt the environment in some other, perhaps unpredictable, way.

To help make sense of Henderson’s point about methane, here is a quick chemistry refresher: Carbon dioxide (CO₂) is a molecule consisting of one carbon atom and two oxygen atoms, while a molecule of methane (CH₄) consists of one carbon atom and four hydrogen atoms. Standard estimates conclude that a ton of methane is eighty-four times as potent in “global warming potential” as a ton of carbon dioxide over a 20-year horizon, and that perhaps one-fourth of humanity’s contribution to global warming to date has come from methane emissions.

Rather than restate the arguments that Henderson and I have made, it might illuminate the issues better if I now tackle two of the particular objections that critics raised in the comments section of the popular blog EconLog where Henderson posted his article.

Objection #1: “Tax Carbon Dioxide or Methane: Why Not Both?”…

Objection #2: “So Let’s Subsidize Trees and Tax Carbon!”…

Conclusion

Economist David R. Henderson used to believe that if the government were going to “do something” about climate change, then a carbon tax seemed to be the obvious policy tool to use. Yet now he has had serious doubts. This isn’t because he’s a “science denier” but rather because he’s thought through some of the limitations of the Pigovian tax framework for dealing with alleged negative externalities. Especially for activists who genuinely believe the world faces catastrophe, they should give serious consideration to Henderson’s reasons for thinking a carbon tax might be a false “solution” to climate change after all.

Originally published at the Institute for Energy Research

Be seeing you