Should There Be a Carbon Subsidy?

Increased Carbon Dioxide May Be Generating Social Benefits

JULY 01, 1998 by ROY CORDATO

The Clinton administration has committed the United States to a massive reduction in the use of energy. That is the implication of its signing the United Nations Global Climate Treaty in Kyoto, Japan. If the Senate approves, we will have to reduce carbon dioxide (CO2) emissions drastically CO2 is emitted naturally, of course, by everything from erupting volcanoes to exhaling people and animals. Indeed, without it there could be no human or plant life. The alleged problem is that, because of the burning of carbon-based fuels such as coal and oil, “too much” CO2 is being emitted. According to some, this will cause excessive amounts of heat to be trapped in the earth’s atmosphere and ultimately (50 to 100 years from now) lead to “global warming.” This warming could have certain harmful side effects, including increased flooding and droughts, rising sea levels, and even melting of the polar icecaps.

These predictions, accepted as gospel by the United Nations and the Clinton administration, if not by the scientific community, have led to the signing of the Kyoto agreement. If the U.S. Senate were to ratify this treaty, massive new taxes on the use of coal and oil—”carbon taxes”—would be required. Americans would be forced to reduce their use of these fuels by about 25 percent over the next ten years.

These new taxes, which, according to some estimates, could more than triple the producer price of coal and double the producer price of oil and gas, are defended on grounds they will allegedly generate “net benefits” for society. Proponents say the future harms that will be avoided will outweigh the problems and dislocations that these higher prices would cause. As the World Resource Institute states in one of its studies, “the justification for a carbon tax is that the benefits are worth the costs.” This is a direct application of the economic theory of “externalities,” which suggests that when a production process generates harmful effects on society, a tax on that process can enhance social welfare.

In the case of carbon dioxide, there is a complication. The costs-benefit calculus may be turned on its head. According to many scientists, increased levels of CO2 are generating unintended benefits for society. Furthermore, these are tangible benefits that are occurring now, as opposed to the costs of global warming, which are highly speculative and not expected to occur, if at all, until well into the next century. As was recently reported in Science, the journal of the American Association for the Advancement of Science, “many climate experts caution that it is not at all clear yet that human activities have begun to warm the planet—or how bad greenhouse warming will be.”

On the other hand, CO2 generally provides great benefits for the earth and mankind, This we know with certainty. Elizabeth Cullota, writing in the May 1995 issue of Science, points out that “CO2 is more than a greenhouse gas–it’s also an essential nutrient for vegetation, an aerial fertilizer providing the carbon that plants use to make sugars, carbohydrates, and the other compounds they need to live.” She concludes that “in the agricultural realm, experimental evidence suggests that higher CO2 concentrations may be a boon, helping many crops grow faster and yield more.” According to a Duke University study cited by Cullota, as much as 10 percent of the increased crop yields over the last 100 years have come from higher levels of atmospheric CO2.

Better Use of Water

A second benefit to agriculture associated with added CO2 is the increased efficiency with which plants use water. As atmospheric CO2 mounts, plants make more productive use of any given level of rainfall. A study published in the November 1997 Science points out that “For the individual plant, water-use efficiency is almost directly proportional to the level Of CO2 . . . . [D]oubling the CO2 concentration is almost like doubling the rainfall as far as plant water availability is concerned. . . .” The study goes on to conclude that “Given that the availability of water for agriculture is already becoming such a problem, this aspect . . . of atmospheric change is a welcome one.”

These benefits are in addition to those that are likely to occur in the event that warming actually takes place. Increased temperatures, especially those that occur overnight, will delay the first frost and prolong growing seasons, further expanding crop yields.

Behold the economic implication of all this: increased CO2 caused by the burning of fossil fuels may be generating social benefits—more fruits and vegetables, lower food prices, and reduced world hunger. It is important to note that many of these benefits are occurring here and now. They seem much less speculative than the hypothesized costs associated with global warming. These costs will occur only if predictions of certain computer simulation models are accurate-models that continue to dramatically overstate the actual warming that has taken place over the last 100 years. This raises an interesting question: should the Kyoto Protocol have called for a worldwide expansion of the use of carbon-based fuels rather than a reduction?

Is a Subsidy Justified?

According to the same economic theory that leads many to advocate a carbon tax if increased CO2 generates external harms, a carbon subsidy would be required if the external effects of using coal and oil are, on net, beneficial. Thus, should the United States be considering a carbon subsidy rather than a carbon tax? Of course not. But even the conventional approach would have to answer: probably not. When the net effects of external harms and benefits are uncertain, the economic theory of “second best” argues that neither taxes nor subsidies are appropriate. The evidence implies that cautious policymakers seeking a neutral approach should be looking for opportunities to eliminate existing taxes on gasoline and electricity. Furthermore, restrictions on coal mining and oil drilling, which are the equivalent of a tax, should also be eliminated. In other words, a conventional, cautious “second best” approach would end all existing carbon taxes and subsidies. Since advocates of carbon taxes have been quick to invoke the economic theory of external effects to justify the tax, one would hope that intellectual honesty would lead them to consider its full ramifications.


July 1998



Roy Cordato is the Vice President for Research and resident scholar at the John Locke Foundation. He is a member of the Mont Pelerin Society and the former executive board member of The Association of Private Enterprise Education. He holds an M.A. in urban and regional economics from the University of Hartford and a Ph.D. in economics from George Mason University.

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