Flaws in Economic Models of climate change do not alter the viability of a Carbon Tax Policy

By: Tommy Drenis

This past July, the House of Representatives passed a new resolution on carbon taxes, in which the general consensus of House members on an issue is expressed. In this case, members voted 229-180 in favor of a resolution “expressing the sense of Congress that a carbon tax would be detrimental to the United States economy” [1]. Following the decision by President Trump to withdraw from the Paris Accord in 2017, this vote represents continued sentiment by America’s elected officials that the economic effects of climate change do not eclipse those of a carbon tax policy.

Such political beliefs are not novel in the U.S. and have existed in the majority for a great period of time. Since the 1970s, in an attempt to reverse these beliefs, economists such as William Nordhaus have developed models of the economic effects of climate change, collectively referred to as integrated assessment models. In helping to begin these efforts, Nordhaus was recently awarded with the Nobel Prize in Economics [2].

More specifically, these models attempt to estimate the social cost of carbon, which is essentially the external cost of carbon emissions that society realizes in the form of climate change. However, such estimates of the social cost of carbon are very rough, based on many assumptions and uncertainties about the relationships between carbon emissions and temperature change, temperature change and economic effects, etc. [3]. As a result, even the Nobel Prize committee acknowledged that the integrated assessment models developed by Nordhaus cannot eliminate the uncertainty surrounding “the economic and human damages caused by climate change” [2].

The fact that these models are built on many assumptions and uncertainties builds the basis for the arguments that critics of carbon taxes propose. In the eyes of many, since these models cannot provide accurate estimates of the social cost of carbon without flaw, the economic basis for carbon taxes cannot be made.

 However, what these models clearly show is that carbon emissions do provide an external cost to society. While limited experimental data at the moment makes accurately identifying the social cost of carbon very difficult, it is obvious that such a cost does exist. As a result, the fact that there are flaws in estimating the exact social cost of carbon does not draw away from the fact that this cost is present.

Furthermore, the actual economic impact of a carbon tax policy is negligible. In fact, a very expensive $50 carbon tax rising by 5% every year was found to only deter U.S. GDP growth by 0.1% per year [4]. As a result, given that we know that carbon emissions create an external cost on society, and that the impact of carbon taxes is negligible, the disadvantages of not creating a carbon tax are much greater than implementing one.

For example, if the impact of climate change on the economy is much smaller than current rough estimates forecast, little cost to the economy will be endured with a carbon tax policy. However, if these current predictions greatly underestimate the extensive economic damage that climate change may cause, a carbon tax policy will be seen as both beneficial and necessary.

Whichever scenario the future holds, the greater downside that exists of not creating a carbon tax in the present is obvious. Therefore, the fact the economic models cannot accurately predict the exact cost of climate change on the economy is of little relevancy to the debate regarding a carbon tax policy.

At the moment, the U.S. is one of an increasingly small group of developed nations to have not yet implemented carbon taxes. With the U.S. producing around 16% of the world’s carbon emissions as of 2015, it is imperative that the decision is made to join the United Kingdom, France and others in levying a carbon tax [5].

1 – https://thehill.com/policy/energy-environment/396948-house-to-vote-on-measure-denouncing-carbon-tax

2 – https://www.nobelprize.org/uploads/2018/10/popular-economicsciencesprize2018.pdf

3 – http://web.mit.edu/rpindyck/www/Papers/PindyckClimateModelsJELSept2013.pdf

4 – https://www.theguardian.com/environment/climate-consensus-97-per-cent/2018/jul/16/comprehensive-study-carbon-taxes-wont-hamper-the-economy

5 – https://www.carbontax.org/where-carbon-is-taxed/