New Study Finds Carbon’s Private Benefits Exceed Social Costs
“The private benefit of carbon is large and, in most cases, much larger than the social cost of carbon,” concludes University of Sussex economics professor Richard Tol in “The Private Benefit of Carbon and Its Social Cost.” Indeed, private benefit exceeds social cost by anywhere from about 4:1 to 34:1, as I read Tol’s paper.
Yet in the same paper, Tol advocates carbon taxes and claims such constraints would increase the private benefit of carbon. Huh?
Tol estimates the global average private benefit of carbon—the marginal value of energy services provided by fossil fuels—to be $411 per ton of carbon dioxide. By marginal value, he means a product’s price in an “undistorted market, with rational and well-informed consumers and producers.” He explains:
We are only prepared to buy something if the welfare gain of getting it is greater than the welfare loss of giving up part of our income and thus the opportunity to buy something else. Vice versa, we are only prepared to sell something if the price we get exceeds the loss we suffer from no longer owning it—for instance because the money gained allows us to buy something we appreciate better.
Of course, energy comes “in a dizzying variety” of forms (everything from nuclear reactors to dried “cow pats”), prices differ in different markets, and prices continually change in the same markets. Nonetheless, Tol uses the best data he can find (mainly from the International Energy Agency) for 66 different countries for the year 2010.
Among countries, the private benefit of fossil energy is lowest in Kazakhstan ($48-67/tCO2) and highest in Norway ($6,241-6,277/tCO2). Among economic sectors, the private benefit of carbon is lowest for coal use in industry ($38-65/tCO2) and highest for residential electricity use ($1,877/tCO2).
The factors accounting for those rather large ranges are not obvious. Why is the private benefit of fossil energy in Kazakhstan, a poor country almost totally dependent on fossil fuels (97%, EIA), so much lower than in Norway, a wealthy country that gets nearly all of its electricity from hydro (97%, EIA)? Why also is the benefit of coal use in industry so much lower than the benefit of fossil energy in household electricity? The paper does not explain.
In any event, the mean of published social cost of carbon (SCC) estimates is $12/tCO2 for studies using a 3% pure rate of time preference and $98/tCO2 for studies using a 1% rate, according to Tol. Hence the private benefit of the energy associated with 1 ton of CO2 is much bigger than the social cost. Only 0.6% of fossil energy use has a private benefit less than the lower SCC estimate, and only 9.8% has a private benefit lower than the higher SCC estimate. In other words, “More than 90% of fossil energy use adds more value than it destroys.”
Tol says that if a carbon tax is imposed equal to the lower SCC estimate, “0.6% of end-use energy prices would more than double.” And if the tax were equal to the higher SCC estimate, “9.8% of energy prices would more than double.” In addition, 36.8% of energy prices would increase by “more than 50%,” and 88.1% would see a “price rise of more than 20%.”
Based on those numbers, Tol concludes that if governments impose a $98/tCO2 tax on fossil energy, “energy use would fall and the private benefit of carbon would rise.” So, we should support a carbon tax to make fossil energy more valuable? Tol wraps up with an assurance that his main finding—private benefits exceed social costs—does not impair the case for carbon taxation:
These estimates corroborate one of the key findings of the literature on greenhouse gas emission reduction: Well-designed climate policy does not have a large, negative impact on economic growth (Clarke et al., 2014). It cannot, because the end-use price of energy does not increase by much and energy is, in most cases, only a small share of business and household expenditure. Furthermore, carbon permits create new revenue too, for the government in case permits are auctioned and for emitters in case of grand parenting.
I don’t buy it. Tol argues as if adopting a carbon tax is a blackboard exercise rather than a political issue in which the driving forces are ideological passion and special-interest greed. The power to tax involves the power to destroy. A national carbon tax would put a powerful new weapon of political plunder in the hands of those seeking either to bankrupt fossil fuel companies, enrich campaign contributors at consumers’ expense, finance more government boondoggles, or some combination thereof.
Taxing fossil energy would not increase its consumer benefit. Rather, a carbon tax would destroy consumer surplus—the difference between market price and what consumers are willing to pay.
Unlike income or sales taxes, a carbon tax is concentrated on a relatively narrow segment of the economy—companies that produce, transport, or combust fossil fuels. The narrower the base on which a tax is levied, the more potentially damaging to the economy as a whole.
The Congressional Budget Office estimates a “modest” carbon tax could raise an additional $100 billion a year in federal revenues. A tax hike of that magnitude concentrated on a single industry or sector would do far more damage to investment and employment than if spread across the economy as a whole.
The impact on investor psychology should also be considered. Any such declaration of economic warfare on a particular industry is bound to scare away investors, with predictably painful impacts on employment and local economies.
I like and admire Tol, and his new paper is a useful reminder to the guardians of climate orthodoxy that “affordable and reliable energy is a great good.”