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Murphy on Henderson and Carbon Taxes

Summary:
There are several problems here. First, even if we agreed that government (as opposed to private) payments for tree-planting made sense, it doesn’t at all follow that the revenue should come from a carbon tax. In general, raising a dollar of revenue from a tax on carbon content hurts the economy more than raising a dollar from taxing labor or consumption. (My article on the “tax interaction effect” gives the economic intuition behind this point.) So if the government needs to raise $x billion in order to pay people to plant enough trees to strike a blow against harmful climate change, then there’s no reason to raise that $x billion through a carbon tax. It would be less harmful to the economy to raise that revenue using taxes that fall on a broader base, so that

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There are several problems here. First, even if we agreed that government (as opposed to private) payments for tree-planting made sense, it doesn’t at all follow that the revenue should come from a carbon tax. In general, raising a dollar of revenue from a tax on carbon content hurts the economy more than raising a dollar from taxing labor or consumption. (My article on the “tax interaction effect” gives the economic intuition behind this point.) So if the government needs to raise $x billion in order to pay people to plant enough trees to strike a blow against harmful climate change, then there’s no reason to raise that $x billion through a carbon tax. It would be less harmful to the economy to raise that revenue using taxes that fall on a broader base, so that they caused fewer distortions to economic decisions.

Second, the current estimates of the “social cost of carbon,” upon which the dollar amount of carbon taxes is calibrated, would fly out the window if people began a massive tree-planting campaign (or other type of geo-engineering program). If we took the standard computer models and plugged in a scenario where humans plant enough trees (and/or engage in other geo-engineering techniques) to bring the atmospheric concentration of greenhouse gases back to 1980 levels by the year 2080, say, then in the context of that baseline the additional emission of a ton of CO2 today would have a negligible impact on human welfare.

This is from Robert P. Murphy, “Economist David R. Henderson Changes His Mind on Carbon Tax,” Institute for Energy Research, September 4, 2019.

Think of this piece as a contribution to the very animated discussion on my post and article about this issue two weeks ago.

David Henderson
David Henderson is a British economist. He was the Head of the Economics and Statistics Department at the OECD in 1984–1992. Before that he worked as an academic economist in Britain, first at Oxford (Fellow of Lincoln College) and later at University College London (Professor of Economics, 1975–1983); as a British civil servant (first as an Economic Advisor in HM Treasury, and later as Chief Economist in the Ministry of Aviation); and as a staff member of the World Bank (1969–1975). In 1985 he gave the BBC Reith Lectures, which were published in the book Innocence and Design: The Influence of Economic Ideas on Policy (Blackwell, 1986).

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