The Carbon Tax Cliff

Why carbon taxes are a very bad idea

Note: As an energy economist, I have been a staunch opponent of any tax on carbon. The economist’s adage “if you want less of something, tax it” does not apply to energy. Everything we eat, use, wear, and drive depends on fossil fuels. Vaclav Smil explains this brilliantly in “How the World Really Works.” The notion that making the basic building block of modern life, fossil fuels, more expensive will force people to use less is ludicrous. Such a tax will only make everyone poorer and reduce the standard of living.

Mark Mills captures these concepts in the article “The Carbon Tax Cliff.” Mark is a fantastic writer who recently joined the Texas Public Policy Foundation as a Distinguished Senior Fellow and is a contributing editor of City Journal. Enjoy!

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The year 2023 ended with four pieces of legislation in Congress aimed at creating a carbon tax. Since three of those bills have bipartisan sponsorship, we’re more likely to see some form of the carbon tax pass this year. The perceptive Wall Street Journal columnist Holman Jenkins recently observed that Republicans and Democrats are “discovering how a carbon tax might help them reach a variety of policy and constituency pleasing goals.” But pursuing those goals via a carbon tax is antithetical to the interests of American citizens.

The purpose of a carbon tax is to force society-wide reductions in the use of hydrocarbons—oil, natural gas, coal—that, when combusted, emit carbon dioxide (CO₂). Carbon-tax advocates argue, correctly, that today’s climate-driven energy policies—mainly subsidies and mandates for alternative fuels—have been ineffective and inefficient, since those subsidy programs and federal mandates are subject to bureaucratic friction, bloat, misdirection, and kleptocratic influences. Carbon-taxers are also correct in observing that the subsidy/mandate approach requires accepting the ludicrous assumption that government experts know what fuels and energy-technology markets need and should use.

Thus, carbon-taxers believe a better, more effective energy policy is just to make hydrocarbons more expensive, thereby unleashing “market forces” to adopt or invent non-hydrocarbon alternatives. Some in Congress apparently believe this theory, as one of the bipartisan carbon-tax bills is titled the “Market Choice Act.” Promoters also tout the simplicity of a carbon tax.

While that tax could be simple, in theory, what would it achieve? The old saying goes that when you tax something, you get less of it. Meanwhile, humanity has spent centuries trying to reduce the cost of energy to get more of it.

You don’t need to have an opinion on climate change to evaluate the consequences of a carbon tax. The flaws with simplistic market-centric arguments for the tax are revealed by the answers to two key questions. First, just how big of a tax would be required to achieve the desired result, i.e., radically reduced hydrocarbon use? And second, would high-cost hydrocarbons in fact spark “market innovation,” yielding low-cost alternatives that currently are languishing or being suppressed?

Start with the fact that hydrocarbons are used for all products and services, even if indirectly, and directly supply over 80 percent of overall energy for the U.S. and the world. Even “carbon-free” energy technologies are built by consuming hydrocarbons somewhere. Such realities help explain the impact of price on oil demand over recent history. (Oil accounts for 40 percent of all hydrocarbon consumption and fuels 95 percent of all global transportation.) Average oil prices, ignoring short-term volatility, have increased by about 200 percent since 2000. Yet, global oil consumption still rose by 25 percent over that period. You don’t need a degree in economics to wonder what kind of price hike would be needed to reduce demand for oil.

Given the central role of hydrocarbons in the economy, it strains credulity to think there’d be any demand impact, visible or otherwise, from a 20 percent hike in oil prices, the starting point for carbon tariffs. The carbon tax instead would be just another regressive consumption tax to fatten government coffers. Of course, a sufficiently high carbon tax would reduce hydrocarbon demand—by inducing a recession, even a depression. As for proposals to send big chunks of those energy-tax collections as rebates to lower-income households, such rebates effectively lower the cost of the consumed hydrocarbons and thus violate the demand-killing purpose of the tax. And any hopes that a new carbon tax would be implemented in exchange for eliminating an existing tax, or that other nations like China will follow our lead in imposing such a tax, are naïve.

A second part of the case for a carbon tax constitutes the claim that it is “a highly visible commodity tax that can be readily avoided,” because higher hydrocarbon prices would induce the use of existing alternatives and the invention of new non-hydrocarbon technologies. Proponents of this idea concede that, initially, consumers would adopt expensive alternatives only because higher prices were forced on the competition. They insist that the non-hydrocarbon alternatives would quickly become cheaper as rising industrial-production volume reduces firms’ costs, and that the sheer scale of the opportunity stimulates innovation. While that may sound logical, both claims fall apart in reality.

Today’s non-hydrocarbon alternatives are not a nascent industry waiting to scale up to high volumes. Existing alternatives are already in massive, high-volume production, even if not in America. The International Energy Agency (IEA) and other proponents of an “energy transition” regularly tout the hundreds of billions of dollars spent each year on producing alternative-energy hardware. And while one should expect modest price declines as volumes continue to rise—that well-known industrial phenomenon is called Wright’s Law and comes from the combination of experience and technological refinements—such cost declines take time and are only incremental, as Ford and GM have rediscovered in their embrace of high-volume, money-losing EV production. Wright’s Law does not lead to “quantum leaps” and “exponential” changes of the kind needed to compete with hydrocarbons.

Proponents’ related claim that carbon taxation will stimulate foundational innovation is, to put it diplomatically, a novel theory of innovation. Airplanes weren’t invented because of taxes on ships, nor the transistor because of taxes on vacuum tubes, nor the car from taxing horses. Taxing whale oil would not have led to coal-derived kerosene (which, by the way, is what saved the whales), nor would taxing coal have led to nuclear energy. 

Foundational innovations of every kind—true breakthroughs—share a historically (and politically) annoying feature: they have “no predictor function,” as Bill Gates put it nearly a decade ago in an interview about the need for “energy miracles.” The energy-producing and energy-consuming technologies that will be available to consumers and businesses for a long time are those that already exist.

A sufficiently high carbon tax though, would induce the kinds of changes in consumer behavior long promoted by radical environmentalists. To avoid a punitive carbon tax, consumers will drive and fly less, both for business and vacations; they will buy smaller cars (reversing the decades-long preference for SUVs); they will eat less beef; they will leave rooms warmer in the summer and colder in the winter; and more. Carbon-taxers are thus in the same camp as the energy transitionists who emphasize that, in order to cut hydrocarbon use radically, governments will need not only taxation but also legislation to force changes in all manner of personal consumer “behaviors”—affecting  pretty much everything people choose to do to make life more pleasant, convenient, or even just enjoyable.

Popular media and political operatives want the public to believe that a scientific debate exists about whether it’s possible to cut down hydrocarbon use dramatically. But two decades from now, as even the IEA’s “transition” scenarios admit, hydrocarbons will still supply most of society’s energy. And to restate what should be obvious: the quantities and forms of energy used are often hidden from plain sight in labyrinthine supply chains, with hydrocarbons used everywhere. It takes about one barrel of oil in energy-equivalent terms (BOE) to produce 25 barrels of milk, or 20 smartphones, or one ounce of gold; it takes 15 BOE to fabricate one home-sized solar array, or one conventional car; and about 30 BOE to manufacture an electric car.

For the foreseeable future, a vibrant and growing society isn’t possible without continuing and even expanding the use of hydrocarbons. One can understand the political motivations for those, including so-called “skeptics” of the climate apocalypse, to seek some compromise and be seen as “doing something.”

But a different compromise is possible—one slowly gaining currency and that does not require consensus about either the urgency or severity of climate change. Government programs should facilitate our ability to adapt to any challenge nature throws at civilization. Strengthening infrastructures and supply chains against all weather extremes, storms, and natural disasters, regardless of why they happen, would be very beneficial. A carbon tax, by contrast, would be very harmful.

Mark P. Mills is a contributing editor of City Journal, a distinguished senior fellow at the Texas Public Policy Foundation, a strategic partner in the energy fund Montrose Lane, author of The Cloud Revolution: How the Convergence of New Technologies Will Unleash the Next Economic Boom and a Roaring 2020s, and host of The Last Optimist podcast.

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