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Why I Oppose a Carbon Tax
...If you believe that human emissions of carbon dioxide create a significant risk of negative climate change, the solution seems obvious: reduce emissions. But this conventional wisdom is exactly wrong.

The United Nations Intergovernmental Panel on Climate Change (IPCC) — which recently, together with Al Gore, won the Nobel Peace Prize — projects that, under fairly reasonable assumptions for world population and economic growth, global temperatures will rise by 2.8°C by the year 2100, and that this will begin to create costs equal to 1 to 5 percent of global GDP sometime in the 22nd century. So, it is argued, we should begin, right now, to reduce emissions of carbon dioxide in order to prevent some or all of these costs. The most frequently discussed methods for doing this are 1) a straightforward tax on carbon and 2) an inefficient, back-door (and therefore politically more palatable) tax on carbon called a cap-and-trade system.

Now, 1 to 5 percent of global GDP is a huge amount of money, and an ounce of prevention can be worth a pound of cure. But, in the case of global warming, the values may be exactly reversed: Getting most of the carbon out of the energy cycle today would be very expensive, and a century is a long time to wait for the payoff from this investment.

As we all know from everyday life, normally I would rather have a dollar today than the promise of a dollar a year from now. I “discount” the promise: The amount of cash I would be willing to take today in lieu of that promised dollar is termed its “present value,” and the percentage lower I am willing to accept today is called the “discount rate.” When decisions are made on the timescale of centuries, however, discounting can have counterintuitively large effects: Consider that if the legendary sellers of Manhattan Island had put $28 in an account with a 4 percent real interest rate in 1626, they would have enough money in the bank today to buy back all of the land in Manhattan. Albert Einstein supposedly said that “the most powerful force in the universe is compound interest” — and this mathematical reality is central to the correct evaluation of plans to address the risk of climate change.

The “Stern Review,” produced by the British government last year, is cited frequently as demonstrating that the world should begin immediate, aggressive emissions abatement. But William Nordhaus, a Yale professor widely considered to be the world’s leading expert on this kind of integrated environmental-economic assessment, has pointed out that a crucial feature of the Stern Review was its assumption of a very low discount rate. To demonstrate just how unrealistic that assumption is, Nordhaus asks us to imagine a scenario in which global warming would lead to zero costs between now and the year 2200, at which point global economic growth would be permanently reduced by 0.1 percent — in other words, that economic output starting in 2200 would be 99.9 percent of what it would have been had there been no global warming. Under this scenario, how much should we be willing to pay today as a lump sum to avoid this cost? Using the assumptions of the Stern Review, Nordhaus points out, we would pay about $30 trillion, which is more than half of the world’s entire annual economic output. Thanks, but no thanks.

Why would sophisticated advocates for rapid, aggressive emissions abatement make such an obviously unrealistic assumption? Because they’re in a box. Given current global-warming-impact projections and normal economic assumptions, the costs of global warming justify only limited actions for the next several decades. ...