Monday, June 6, 2016

The Cost of Getting Rid of Fossil Fuels

The climate change narrative goes something like this:

The burning of fossil fuels such as coal and oil emits large quantities of CO2. That CO2 traps heat from the sun that would otherwise be radiated into space. The trapped heat is causing higher temperatures on average as well as more intense droughts and storms. The changing climate is causing extinctions, diseases, and deaths. Glaciers and polar ice caps are melting and will flood our coastal cities unless we do something. We have to stop burning fossil fuels in order to avoid flooded cities, huge storms, terrible droughts, and other terrifying consequences. The economic costs of changing our energy infrastructure will be huge, but we have to save our coastal cities and ecosystems.

This climate change narrative is wrong.

Melting icecaps and droughts are predicted by the most recent Intergovernmental Panel on Climate Change Report. This report is based on sophisticated computer models which use more than a century of weather data. It was extremely thoroughly peer-reviewed and vetted. I'm not arguing with that.

We should stop burning fossil fuels because it will help the economy.

A revenue neutral carbon tax would both help stop global warming and improve the economy. A carbon tax is a tax on CO2 emissions. Those are the emissions that cause global warming. A revenue neutral tax is a new tax which is offset by a decrease in other taxes. In the case of a revenue neutral carbon tax, the government would refund an equal share of the tax revenue to each American.

Coal miners and S.U.V. mechanics would lose their jobs, but solar technicians would gain jobs. So where does that leave us economically? According to Keynesian fiscal multiplier theory (review your macroeconomics 102 here), right back where we started. The carbon tax would depress economic output (lost jobs in the coal industry). Americans would spend their carbon tax refund checks disproportionately on solar and wind power (more jobs in those industries). Because the amount of the tax is equals to the amount of the refund, the effect on economic output (GDP) is neutral.

The carbon tax and tax refund puts money into the pockets of Americans who produce less CO2 than average (those who consume fewer carbon intensive goods and services) and takes money from those who produce more CO2. On average, the wealthy produce more CO2 than the poor (when is the last time you saw a poor man with a private jet). The poor spend more of their income than the wealthy who save more. The monetary redistribution of the carbon tax and refund would stimulate the economy, increasing GDP and with it employment.

But we can do better. There will need to be improved energy infrastructure necessary to support the changes in energy production. Someone will have to build a new energy grid. Because the grid will support the new power sources that will sustain everyone, it makes sense that the government should pay for it. And low and behold, the government has a great source of revenue in the form of the carbon tax. It could take a portion of that tax and use it to build an improved grid. The increased spending would stimulate the economy even more than refunding the entire carbon tax. (Some percentage of the refunded tax is saved. That saved portion does not stimulate the economy.)

Have you seen the flaw in my argument yet? On its own, a carbon tax would make American industry less competitive. A factory in India would be able get its energy from the cheapest source possible (assuming India does not also implement a carbon tax) whereas a factory in Ohio would have to pay a carbon tax or buy more expensive clean energy. Companies would move production overseas. The carbon tax would be exporting both jobs AND pollution. Bad news. But it's easily fixed. The U.S. could simply slap onerous tariffs on goods from countries whose carbon emissions policy was not at least as progressive. As the largest consumer market in the world, every country will fall in line and adopt a carbon tax or something similar.

So there you have it. Of course, climate change is a great reason to implement a carbon tax. The scientific consensus is clear. Humans are causing the climate to warm and that warming will have dire consequences. We will have to address climate change in order to preserve our way of life. But if you don't believe that, fine. No problem. We should tax carbon emissions anyway. It will help the economy. The climate skeptic's economic argument falls flat on its face. Getting rid of fossil fuels won't cost us money. It will be a huge boost to the economy.

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