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Economists Say Carbon Taxes Increase Carbon Emissions

by Spencer Morrison

Most legislation especially the liberal bills tend to have really awful unintended consequences. That’s because their primary purpose is to change human behavior. Except humans aren’t always predictable. That’s what happens with Carbon Taxes. Instead of forcing the use of carbon-based fuels to diminish, economists say carbon taxes cause an increase the CO2 in the atmosphere.  

As the hysteria over global warming heats up, carbon taxes have become the “cool” option. Environmentalists love them. So do politicians, who are more than happy to raise taxes while scoring political points.

Carbon taxes, or other analogous pricing schemes, are now prevalent in Western Europe, and are making headway in North America—California recently joined forces with the Canadian Provinces of Ontario and Quebec to create an integrated cap-and-trade carbon market.

Also, many well-known economists support carbon taxes. A relatively new report, written by thirteen leading economists under the direction of professors Nicholas Stern and Joseph Stiglitz, recommends the adoption of a global carbon tax. The tax would value carbon emissions somewhere between 50 and 100 USD per ton by 2030 and would cost upwards of $4 trillion. Theoretically, the tax would raise the cost of using carbon-intensive sources of energy, thereby nudging producers to switch from fossil fuels to “green energy” sources.

Theoretically, this makes sense, but reality’s a bitch.

Carbon taxes are just that: taxes. They’re a money-grab disguised with good intentions. Worse still, carbon taxes will not reduce our greenhouse gas emissions. Instead, adopting them in the West will actually raise global carbon emissions by offshoring economic activity from environmentally-friendly places, like the USA, to places with lax environmental laws, like China.

Offshoring, or How Carbon Taxes Raise Global CO2 Emissions

Wealth is like water: it flows to the lowest possible point and continues to do so until the level is equal. This is why consumers chase cheaper goods, why investors look for undervalued companies, and why multinationals offshore to cheaper markets. This last point—offshoring—is why Western carbon taxes will actually increase global emissions.

The underlying logic is fairly straightforward. Pretend there are only two countries in the world: Germany and China. The cost of doing business in them is identical, however, China’s economy is twice as carbon-intensive as Germany’s. In other words, it costs $1 to build a widget in either country, but the widget’s carbon footprint in Germany is only 1 kilogram of carbon, compared to 2 kilograms in China. Clearly it’s better for the environment if widgets are made in Germany.

But Germany’s not satisfied: they want to further reduce their carbon emissions. Therefore, they impose a carbon tax of 10 percent per widget. This raises the cost of making widgets in Germany to $1.10. Ideally, German widget-makers will invest in energy-efficient machinery, and the government can use the tax revenues to plant more trees.

Sadly Germany’s politicians forgot something: Germany is an open market. This means that German consumers can simply buy Chinese widgets—which still only cost $1 to make. At this point, Germany’s widget-makers have two options: (1) they can foreclose, since they’re unable to compete with artificially cheaper Chinese widgets, or (2) they can move their factories to China and import the widgets back into Germany. Either way, China ends up building enough widgets for both China and Germany, and Germany doubles its carbon emissions.