Thursday, January 17, 2019

The "Economists' Statement on Carbon Dividends"

I was asked today (by Janet Yellen!) to sign on to the "Economists' Statement on Carbon Dividends."  I declined.  I'm unsure why they call it this -- perhaps to fool people into missing that it's actually a tax.  Regardless, I think it's a bad idea.  Here's the reply I sent to Dr. Yellen.  (You can find the "Statement" here and here.)

Dear Dr. Yellen – thank you for the offer to sign this statement.  I won’t sign, for three reasons. 

First the proposal in the statement for a Hotelling trajectory carbon tax is based on erroneous models of an optimal carbon tax.  The standard Hotelling tax trajectory is inefficient because it ignores climate inertia.  The recent paper by Lemoine and Rudik in the AER (Oct. 2017) demonstrates this, and a calibrated version of their model suggests the tax proposed in your petition has at least 10 times the cost of the efficient tax.

Second, I’m skeptical of the IPCC claims of sudden urgency; IPCC report SR15 does not establish claims that immediate drastic action is necessary.  A careful reading of the IPCC report suggests it is really about quickly and incautiously implementing U.N. Sustainable Development Goals, for purposes of so-called “social justice.”  It appears to be a rent-seeking scheme for massive redistribution of political power and wealth, rather than a climate proposal.

Third, I’m skeptical that a unilateral U.S. carbon tax has any important power to address climate change, since the lion’s share of new emissions will come from the developing world.  The border adjustment component is more likely to be an effective trade barrier and little else.

In my opinion, your proposal is the least bad of all the bad solutions to climate change, and certainly superior to the proposals in IPCC SR15 or the Green New Deal.  But you’ve omitted important economic and climate factors, and your proposal is still wildly inefficient.


Charles N. Steele, Ph.D.

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