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Research & Commentary: Huge Carbon Tax Would Do Serious Economic Harm to New York Businesses, Families

March 5, 2018

Tax Proposal Would Start at $35 Per Ton, Cap At $185 Per Ton

Matching proposals under consideration in the New York State Legislature would establish a massive carbon-dioxide tax on fossil fuels.

The purpose of the carbon tax is to decrease carbon-dioxide emissions by levying a tax based on the amount of emissions produced. The proposals would levy this tax on gasoline, heating oil, coal, natural gas, propane, and renewable biomass. The tax would begin at $35 per ton in 2018 and increase by $15 per ton annually until reaching a cap at $185 per ton. Sixty percent of the collected revenues would be rebated to “very low to moderate income” New Yorkers, progressively structured depending on how far below or above the household income is in the “area median income as determined by the department of housing and urban development.”

These rebates are necessary because carbon dioxide taxes are inherently regressive and disproportionally harm low-income families. The Congressional Budget Office (CBO) found a $28 per ton carbon tax would result in energy costs being 250 percent higher for the poorest one-fifth of households than the richest one-fifth of households. CBO reports the reason for cost discrepancy is “a carbon tax would increase the prices of fossil fuels in direct proportion to their carbon content. Higher fuel prices, in turn, would raise production costs and ultimately drive up prices for goods and services throughout the economy … Low-income households spend a larger share of their income on goods and services whose prices would increase the most, such as electricity and transportation.”

In 2017, the Conference Board of Canada (CBC) found a nationwide carbon tax in that country would shrink its gross domestic product by as much as $3 billion in the tax’s first year and also depreciate the Canadian dollar. By 2025, CBC estimated an $80 per ton tax would result in a net annual cost to the average Canadian household of close to $2,000.

Another problem with a carbon-dioxide tax is any environmental benefits that it might produce would be effectively meaningless without concomitant legislation enacted throughout the rest of the globe. “The effectiveness of a carbon tax as a matter of environmental policy [depends] not only on how it would directly alter the trajectory of [local] emissions but also on its ability to affect global emissions by driving globally applicable technological innovation or by influencing the behavior of foreign governments,” writes Oren Cass, senior fellow at the Manhattan Institute, in National Affairs. “On each of these dimensions, the carbon tax fails.”

In a December 2015 speech to the U.N. Framework Convention on Climate Change (UNFCCC), former Secretary of State John Kerry said, “The fact is that even if every American citizen biked to work, carpooled to school, used only solar panels to power their homes, if we each planted a dozen trees, if we somehow eliminated all of our domestic greenhouse gas emissions, guess what—that still wouldn’t be enough to offset the carbon pollution coming from the rest of the world.” A country-wide carbon tax that completely reduced U.S. emissions to zero by 2050 would only avert global temperatures by just 0.2 degrees Celsius by 2100. A state-based carbon tax would have even less impact on global temperatures.

It is likely for these reasons the U.S. public finds the idea of a carbon tax so unpopular. An October 2017 poll of 1,038 adults conducted by the Associated Press and the NORC Center for Public Affairs Research for the Energy Policy Institute at the University of Chicago revealed 68 percent of respondents said they were unwilling to pay an extra $20 month on their electric bills to combat climate change, although this amount is “roughly equivalent to what the federal government estimates the damages from climate change would be on each household.”  Further, almost half the respondents, 42 percent, said they would be unwilling to pay even one extra dollar.

At 14.47 cents per kilowatt hour, New York currently has the sixth-highest retail electricity prices in the continental United States, according to the U.S. Energy Information Administration. The Tax Foundation already ranks New York’s tax climate as the second worst in the country,  and WalletHub lists the average New Yorker’s total energy costs at $284 per month. The high energy prices and burdensome tax climate are primary reasons New York has experienced more than 1 million residents flee the state since 2010. A carbon-dioxide tax of this magnitude would make everything more expensive for working families in New York, who are already pinched by the state’s high costs, leaving them less to spend and save – all without any guaranteed environmental benefits.

The following documents provide more information about carbon taxes.

The Deeply Flawed Conservative Case for a Carbon Tax
https://www.heartland.org/publications-resources/publications/the-deeply-flawed-conservative-case-for-a-carbon-tax
In this paper published by the American Enterprise Institute, Benjamin Zycher says the “conservative” Climate Leadership Council’s (CLC) much-hyped carbon-tax proposal is “naïve” and “virtually all of the … assertions in support of its proposal are incorrect or implausible.” The CLC’s plan is “poor conceptually and deeply unserious,” wrote Zycher.

The Case Against a U.S. Carbon Tax
https://www.heartland.org/publications-resources/publications/the-case-against-a-us-carbon-tax
In this paper from the Cato Institute, Robert P. Murphy, Patrick J. Michaels, and Paul C. Knappenberger examine carbon-dioxide tax programs in place in Australia and British Columbia and consider whether similar programs would be successful in the United States. They conclude, “In theory and in practice, economic analysis shows that the case for a U.S. carbon tax is weaker than its most vocal supporters have led the public to believe.” 

Economic Outcomes of a U.S. Carbon Tax
https://www.heartland.org/publications-resources/publications/economic-outcomes-of-a--us-carbon-tax
This report from the National Association of Manufacturers evaluates the potential impacts carbon taxes whose revenues would be devoted to a combination of debt and tax rate reduction would have on the U.S. economy. The results consider the varied economic effects of fossil-fuel cost increases caused by carbon taxes, as well as the positive economic effects of the assumption that carbon tax revenues would be used to reduce government debt and federal taxes.

The Carbon Tax Shell Game
https://www.heartland.org/publications-resources/publications/the-carbon-tax-shell-game
Oren Cass of the Manhattan Institute argues the carbon tax is a shell game. The range of designs, prices, rationales, and claimed benefits varies so widely that assessing the validity of most proposals is nearly impossible to accomplish. In this article for National Affairs, Cass says the effect of carbon-dioxide taxes on emissions has proven to be insubstantial, a fact he says is ignored by the tax’s proponents when promoting its purported benefits. Cass also says carbon-dioxide taxes’ negative fiscal effects are claimed to be offset by efficiency improvements and by promising the revenues will be spent to offset the costs, but he says the same revenues are often promised to different constituencies to accomplish completely different and largely incompatible goals.

Less Carbon, Higher Prices: How California’s Climate Policies Affect Lower-Income Residents
https://www.heartland.org/publications-resources/publications/less-carbon-higher-prices-how-californias-climate-policies-affect-lower-income-residents
This study from Jonathan Lesser of the Manhattan Institute argues California’s clean power regulations, including the state’s renewable power mandate, is a regressive tax that harms impoverished Californians more than any other group. 

Assessing the Social Costs and Benefits of Regulating Carbon Emissions
https://www.heartland.org/publications-resources/publications/assessing-the-social-costs-and-benefits-of-regulating-carbon-emissions
The government is required to quantify the costs and benefits of regulations they propose. In the context of regulations pertaining to carbon-dioxide emissions, various agencies have been using differing estimates of the net social cost related to carbon dioxide. In response, an interagency working group (IWG) was created to establish a consistent and objective “social cost of carbon.” The range of estimates of the social cost of carbon produced by the IWG is too narrow and almost certainly biased upwards. Using better models and the most recently available evidence on climate sensitivity, this study from the Reason Foundation finds the range of the social cost of carbon should be revised downwards. The study states carbon-dioxide emissions may have a net beneficial effect on the environment.

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Environment & Climate News, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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Author
Tim Benson joined The Heartland Institute in September 2015 as a policy analyst in the Government Relations Department.
TBenson@heartland.org