Posted by: bmeverett | January 1, 2013

Why The New York Times loves the Irish Carbon Tax


The New York Times thinks that Ireland has the answer to all our economic and environmental problems – a carbon tax. In a December 27 article entitled “Carbon Taxes Make Ireland Even Greener”, Science Editor Elisabeth Rosenthal lauds the Irish government’s 2009 decision to impose a tax on each type of energy based on its carbon content and to impose high registration fees on automobiles based on their fuel economy. Ms. Rosenthal claims that “Environmentally and economically, the new taxes have delivered results.” She notes that “Although much of that decline [in carbon emissions] can be attributed to a recession, changes in behavior also played a major role, experts say….” Let’s call a time-out right here. Reporters often ask “experts” instead of actually doing the math themselves. The danger in this approach is that you can always find an “expert” who says what you want. It’s much harder to extract your preferred conclusion from arithmetic. Here’s the analysis Ms. Rosenthal should have done.

According to Irish government statistics, carbon dioxide emissions in Ireland fell from 45.3 million metric tonnes (mt) in 2007 to 35.9 million mt in 2011 – an impressive drop. How much of that decline was due to the recession and how much to improved carbon efficiency? You don’t need an expert; you can calculate the number yourself. In 2007, Ireland’s GDP (in $2012) was $289 billion, so carbon dioxide emissions were 157 grams per $ of GDP (45.3 divided by 289). The recession hit Ireland particularly hard, and by 2011 GDP had declined by 23% to $222 B. Carbon dioxide emissions, however, declined by only 21%, so the carbon efficiency of the economy actually deteriorated from 157 grams to 162 grams per $ of GDP. “Experts” notwithstanding, the decline in Irish CO2 emissions was due entirely to reduced living standards. Where exactly do the “experts” see the influence of these wonderful taxes?

The US has no carbon tax, no “cap-and-trade” system, no heavy excise taxes on fuel, no massive fees on car registration, so presumably the US must have a worse track record on reducing its carbon emissions over this period. Actually, no. Our economy was not hurt nearly as badly as the Irish, falling from $15.5 trillion ($2012) in 2007 to $15.1 trillion in 2011 – a decline of about 2½%. Over the same period, however, US carbon dioxide emissions fell by almost 8% from 6.5 billion mt to 6 billion mt. Now, to be fair, Americans, emit more carbon than the Irish (389 grams per $ of GDP compared to 161), but that’s not the issue. The question is whether Ireland was able to achieve reduction in CO2 emissions by dropping a ton of tax bricks on Irish consumers. The answer appears to be “no”.

We are seeing here the essential narcissism of the climate change movement. Instead of doing the math to figure out whether they are actually solving any problems, they just want to pat themselves on the back for reducing their carbon footprint. What would it actually take to stabilize or reduce atmospheric concentrations of CO2? We don’t understand the climate system well enough to know, of course, but let’s say we set an objective of reducing global carbon dioxide emissions by 50% by the year 2035. Currently, the world emits about 35 billion mts of CO2 annually, or about 5 mt for each of the 7 billion people on the planet. By 2035, we anticipate about 8 billion people, so each could emit on average only a little over 2 mt if we are to reach our goal. The Irish are currently emitting about 8 mt per person – about four times the required amount.

Furthermore, the Irish have already taken many of the easy steps to reduce carbon emissions. In the 1980s, Ireland’s electric power sector grew primarily on imported coal and oil. In the 1990s, however, they began to replace coal and oil with imported natural gas and have now reduced coal and oil use in power generation by two-thirds. As noted above, they have slammed Irish consumers with massive taxes on transportation. They’ve built a bunch of expensive wind turbines that now provide about 8% of their power supply. What else are they going to do to get a 75% reduction in their carbon footprint over the next 20 or so years? Suppose, for example, that Ireland replaces all the coal, peat and natural gas in its electric power industry with wind, solar and other zero-carbon renewables. This would hit Irish ratepayers very hard, since renewables are much more expensive than fossil fuels for power generation. It would also damage the competitiveness of Irish industry. Savings would be about 10.6 million mt of CO2 each year. Suppose furthermore that the Irish all drive cars averaging 100 miles per gallon. That would save another 3.2 million mt. Even with these draconian measures, Irish CO2 emissions would still be 22 million metric tons or over 5 mt per person – 2½ times their global “allotment”.

Will Irish voters allow their living standard to deteriorate further just to chase the climate change dream? I doubt it, particularly after all the economic pain they’ve suffered over the last few years.

The self-congratulation evident in Ms. Rosenthal’s argument reminds me of a TV interview I saw some years ago with Senator John Kerry and his wife Theresa. They solemnly expressed their deep concern over climate change and announced that they would consider traveling more by commercial airlines rather than private jets. I have no idea whether they made this change in their lifestyle or not, but their promise is truly laughable. The Kerrys were making a fashion statement, not contributing to the stabilization of atmospheric carbon levels.

So how about the economic side of Ms. Rosenthal’s claim that “The three-year-old carbon tax has raised nearly one billion euros ($1.3 billion) over all, including 400 million euros in 2012. That provided the Irish government with 25 percent of the 1.6 billion euros in new tax revenue it needed to narrow its budget gap this year and avert a rise in income tax rates”? It’s rather odd for the NYT to argue that excise taxes are better than income taxes. The NYT has been a major cheerleader for the Obama campaign’s efforts to increase tax “fairness”, parroting the Administration’s argument that the wealthy don’t pay their fair share. President Obama, with a loud “amen” from the NYT, demands that the American national debt crisis not be solved on the backs of the middle class. Apparently, an income tax system in which the top 20% pay 70% of the taxes while the bottom half pay virtually nothing, is insufficiently progressive for Mr. Obama. The President is demanding (and will probably get) an increase in marginal tax rates for the wealthy without any corresponding tax increases for 98% of Americans, all in the name of fairness.

How does a carbon tax meet the fairness test? Ms. Rosenthal claims that “Although carbon taxes in some ways disproportionately affect the poor — who are less able to buy new, more efficient cars, for example — such taxes do heavily penalize the wealthy, who consume far more.” It’s certainly true that the wealthy use more energy than the poor, but the wealthy spend a smaller share of their income on energy than the poor do. This makes carbon taxes by definition a regressive tax, flying in the face of all the arguments about fairness.

The real agenda of the American political left was clarified in the NYT editorial of Sunday, December 30. The US is currently running budget deficits in excess of $1 trillion per year. The Obama campaign implied (although did not say outright) that this deficit could be closed by making the rich pay more. What they proposed during the campaign, however, is an increase in marginal tax rates for the top 2% of earners that would raise revenue of about $80 billion per year. Experience shows that the tax increase won’t actually raise that much money, since the complex tax code still allows people to shield income from taxes in various ways. Even if the tax hike produces as promised, however, it will reduce the deficit by only 8%. Moreover, the President wants to couple that additional revenue with more spending on stimulus and unemployment benefits, not to mention the $60 B requested for relief from the effects of Hurricane Sandy. How on earth will the deficit be eliminated if all we do is couple small tax increases with more spending? The answer is a succession of fundamental tax changes to raise the federal government’s share of GDP from the traditional 20% to 25%, 30% or even higher, as it is in Europe. Following the increase in marginal tax rates, the NYT editorial proposes eliminating deductions, taxing capital gains as ordinary income, raising corporate tax rates, adding a financial transactions tax and imposing higher estate taxes. These tax increases could all be presented to the public as soaking the rich for the benefit of the middle class, but even these are not nearly enough.

Carbon taxes hit the middle class directly. Gasoline in Ireland costs €1.59 per liter or $8.00 per gallon – about $4.75 higher than the current US price. Since the average American household uses about 1,200 gallons of gasoline per year, taxing gasoline at the same rate as Ireland does would cost the average family about $5,700 per year. That amount might be reduced over time through more efficient engines, but only at the cost of driving smaller, less comfortable and less safe cars fewer miles. The Administration could try to portray this to the American public as an environmental policy rather than a tax and could claim that the tax was imposed on ExxonMobil and not on consumers, but people are probably too smart to buy that.

Even if the President Obama could sell all that to the American people, the $500 billion or so in annual revenue from carbon taxes still wouldn’t be enough to eliminate the deficit and allow for further spending increases. That’s when the hammer would really fall. The NYT also wants a value added tax or VAT – a national sales tax on nearly every good and service that people consume. State sales taxes in the US vary from zero in states like Alaska and Delaware to a high of 7.5% in California. In many states, counties or municipalities can add their own sales taxes. European VAT rates, however, average over 20% with some Scandinavian countries at 25%. According to the Bureau of Labor Statistics, the average American family spends about $50 thousand on consumer goods, including roughly (a) $17 thousand on housing, (b) $3 thousand on health care, (c) $7 on pension contributions and charity, (d) $7 thousand on food, (e) $8 thousand on transportation, (f) $3 thousand on entertainment, (g) $2 thousand on clothing and (h) $3 thousand on other goods and services. If Americans were subjected to a 20% VAT on items (d)-(h), as they would be in Europe, the additional tax would be roughly $4,500 per year, raising another $500 billion annually for the government.

So here’s the plan. Step one: soak the rich, which everyone seems to agree on. Step two: save the planet by imposing carbon taxes on the middle class. Step three: Hit the middle class directly with a VAT. Presto-changeo, we’re Europe! In reality, this won’t be easy to accomplish, since President Obama will have to convince the American people to accept this suicidal program before the US runs out of its borrowing capacity. It’s going to be an interesting year.

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Responses

  1. To be fair, Professor, Europe is not such a bad place to live after all, all the while I agree that we suffer from a tax code that is overly burdensome and increasingly unfair. And I would also like to challenge your notion that smaller/lighter cars would be less safe. BMW is starting its new carbon fiber car i3, claiming no reduction if safety standards. And a discussion I would like to have with you is on the causes and consequences of increasing income inequality in both the US and Europe. For now: chapeau to another well researched blog entry, keep it up!!

    • Thank you, Christian, for your thoughtful comments. I plan to devote the next couple of weeks to outlining my views on the current status of solar and wind technology.

      Regarding automobile safety, the car manufacturers can do some things to improve the safety of small cars. Seat belts and air bags do help. Even if the frame of the car can survive a collision without collapsing, however, there are some basic physics involved here. Take, for example, the “smart car” (the tiny vehicle made by Mercedes). If this car hits a tree at 60 mph, the driver is likely to be killed regardless of the design of the vehicle or its safety features. The human body simply cannot decelerate from 60 mph to zero in a small fraction of a second without crushing itself. Larger cars, with bodies designed to crumple in an accident, offer a much greater opportunity to absorb the force of the collision. Smaller cars can be made safer, but they will always be less safe than state-of-the-art larger cars.

      I would never say that Europe is not a nice place to live. I love Europe, particularly my ancestral home of Ireland, but I wouldn’t want to pay taxes there!


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