The Green Economics of the Carbon Tax

During the Cold War the main threat to human existence was the nuclear bomb.  Students were drilled on how to “survive” a nuclear exchange (if it wasn’t for the State, nobody would know that wood was impervious to a fission bomb) and nations stockpiled massive arsenals of warheads to make it irrational for any given nuclear power to wage war upon another.  It was probably during the 1970s that the “green movement” began to gather strength, although many of us are too young to remember those days. For those under the age of thirty-five, the green movement came into being rather recently.  In any case, for all it was after the Cold War that the nuclear bomb was replaced by carbon emissions as the primary threat to humanity’s existence on the green and blue Earth.  Since then, individuals and governments have campaigned in an effort to curtail the pollution of the atmosphere by carbon dioxide; carbon dioxide being the main greenhouse gas that if wantonly produced will cause certain destruction.  It has not been until the new millennium that the government-led movement to penalize companies for their emissions level has really become relevant.  Today, the so-called Carbon Tax has become an economic reality.  It is deemed necessary because otherwise corporations would lead the human population to its own demise.  Unfortunately, the proponents of this legislation have failed to take into account the myriad of evidence against the idea that carbon dioxide is the principal catalyst behind global warming.  Even assuming that it was, the case can still be made that the carbon tax will not necessarily curtail carbon dioxide emissions.

The intellectual-left’s crusade against pollution, for the sake of the Earth, has been summarized by Paul Krugman.  He criticizes the proponents of free trade that have in turn criticized French president Nicolas Sarkozy’s suggestion of a European tax on goods from foreign countries which do not follow Europe’s carbon emission rules.  According to Paul Krugman, Sarkozy’s idea is not protectionist and holds merit since it would ultimately be beneficial to the future of human society as a whole.  In other words, he applies a utilitarian argument against free trade and at the same time dismisses that it is even an issue.  As usual, Paul Krugman commits an immense intellectual blunder by failing to admit merit in the opponent’s evidence against existing global warming theories and also fails to realize the holes in his economic arguments.  Sarkozy, in fact, is threatening to catalyze a trade war.  This does not have to be as dramatic as it sounds.  Nations may not immediately begin to erect tariffs against each other which will stifle, or even freeze, world trade, but necessarily should Sarkozy’s proposition ever become reality there would be immediate and easily seen consequences.  If not completely stifled, international trade would take a huge hit.  Of course, even assuming that Sarkozy’s proposition does suggest a type of protectionism, surely Krugman’s “green argument” has merit.  Indeed, is it not worth sacrificing economic growth if it means that the future of our planet will not be held at stake?

For this to hold true there are two other things which cannot be false.  First, carbon dioxide production by businesses must be the main cause, or a major cause, for global warming.  Second, it must be proven that these carbon taxes will even reduce carbon dioxide production.  Because this website does not discuss science, this topic must be left to those more knowledgeable on the subject.  However, the second proposition does not hold true.  There is no evidence which suggests that the carbon tax will truly lead to a decline in aggregate carbon dioxide production, and there is no evidence that suggests that the carbon tax would be beneficial in the long-run.  Krugman and other left-intellectuals can make all the claims they want, but they will, at some point, have to prove themselves correct.  To date, they have failed in this regard.

When a government puts into effect a tax (a tariff is a tax on a foreign good) it must be understood that theoretically fifty percent of the tax is paid for by the consumer.  This is because the tax will increase production costs, theoretically shifting the supply curve to the left.  As a result, the new equilibrium price is half of the price of tax higher.  Half of the cost is paid for by the company as a result of their decrease in supply, and other half by the consumer, manifested as an increase in cost.  Of course, the graph doesn’t tell the whole story.  If the company is able to get away with an increase in price higher than half of the cost of the tax then they would logically pass the entire tax onto the consumer.  Otherwise, they will pass on the most they can get away with.  As a result, it would be completely rational if the supply curve did not shift as much to the left as it is suggested it would theoretically.  If this is the case, not only is the consumer forced to pay a higher price for the same quality good, but the company is not operating at a lesser margin of profit.  There are other methods a company can reduce costs.  For example, they can replace human labor with machinery (although, remember, this does not really lead to a decrease in unemployment).  Furthermore, it could be the case that the tax costs less than the production plant improvements necessary to cut down on greenhouse gas emissions, making it more economically viable to lose a certain amount of money per product through the tax.  In other words, there is no guarantee that such a tax, whether on local or foreign goods, will cut down on emissions.

In the case of foreign goods, if the product cost less to produce than the local good they can be selling it at a cheaper price.  The tariff tax on said foreign product will have to be higher than the tax on the local company, otherwise that foreign product will still be purchased over the local good.  If the product cost less to produce and is being taxed at the same rate it is still cheaper, and therefore the consumer will still prefer the cheaper foreign product.  If, in fact, the tariff rate is higher than the local tax rate it becomes a matter of protectionism, because the country instilling the tariff is obviously looking to enact some sort of parity between the prices of national goods with the prices of foreign goods.  It no longer becomes an issue of carbon dioxide emissions.  The government is obviously looking to make the local good more desirable in the eye of the consumer, as to avoid having local businesses falter in the face of cheaper foreign products.  This was exactly what the United States did on 17 June 1930, when President Herbert Hoover signed the Smoot-Hawley Tariff Act into law.

The consequences of Sarkozy’s proposition would be obvious.  One could certainly make the case that he is protecting local jobs, but on closer inspection one will note that this is false.  A European tariff on foreign goods could effectively lead to a higher intensity trade war, as foreign nations retaliate.  This could very well lead to the stifling of foreign trade, ultimately leading to a drop in aggregate production.  The tariff also tends to hurt the enforcing country more than the foreign businesses, given that these foreign businesses have a plethora of other trade partners.  It is the country enforcing the tariff that has now forced its consumer to pay a higher price for a good of the same quality, while also causing a leftward shift of the supply of the same good produced locally (or a drop in production).  For Americans, imagine President Obama puts into effect a tariff on foreign cars.  The average American car, for the purpose of this example, costs $15,000.  Before the tariff, the average foreign car had a price tag of $13,000.  In order to make foreign cars more expensive, and local cars more desirable, the tariff add a tax of $6,000, therefore theoretically raising the price of the foreign car by $3,000 for the consumer (the new price would be $16,000).  Then, President Obama enacts a tax on local car companies, consequently raising the prices of their own cars.  This makes little sense, right?  Well, that is basically what Sarkozy is proposing.

There is another long-term problem associated with taxes on carbon emissions.  Imagine a company whose profits are dwindling due to higher production costs (thanks to the taxes).  The incentive to invest is reduced.  Investment is the act of putting aside capital-goods in order to improve technology, production process, et cetera.  There is no doubt that over the long run production efficiency increases.  What does this mean?  Production efficiency relates to a company’s drive to get more out of less.  In other words, it is within a company’s interest to reduce emissions as a way of cutting the costs of waste.  The more they waste the fewer products they have to sell.  Technological progress is the key to cutting the emission of waste.  By reducing that incentive to invest you are guaranteeing that the emission of large amounts of carbon dioxide (if that is, indeed, the case, of course) will occur for a longer period of time.

Carbon taxes, tariffs on foreign products and other “green” political movements do not make sense.  This remains true both on the economic level and the ecologic level.  Those who support these tyrannical laws do not take the unintended consequences into consideration, leading to the making of poor decisions.  They have failed to prove that these taxes will lead to a reduction in carbon dioxide emissions without forcing an equal loss in production, and they have failed to prove that the sacrifice of economic growth will really lead to a healthier Earth.