I know that Thomas Friedman thinks he’s making the case for a carbon tax stronger by emphasizing that it addresses the dangers of both climate change and large federal deficits, but because he’s mixing an honest-to-goodness danger (climate change) with a phantom one (increased debt in the near term), it’s not clear to me he’s helping much. To paraphrase the blogger Daniel Davies, “Good ideas don’t need a lot of misleading arguments mobilized on their behalf.” (I’d like to include a link, but he has since shut down his blog and the post is not available.)
Nevermind that Friedman starts his column by invoking the “cliff” metaphor so common in fiscal policy debates these days, and then riffs off it to decry the mounting public debt of the United States. But [and imagine my hand slapping my forehead] surely everybody knows by now that the danger of the “fiscal cliff” is one of debt rising too slowly, right? And nobody disagrees about this.
The bigger problem is his outsized claim that a too-small ($20 per ton) carbon tax could cut 10-year deficits in half. That sounded high to me, so, I looked up the report he references. It scales the $1.2 trillion raised over 10 years by a $20 per ton carbon tax against the $2.3 trillion in accumulated deficits projected to occur under the current law when the report was written (Sept. 2012).
Even back then, however, most analysts didn’t use this “current law” baseline as a realistic projection—in large part because it assumed that all the Bush-era tax cuts would be allowed to phase out on schedule, something that neither Democrats nor Republicans had supported. It also assumed an austerity-induced recession resulting from deficits closing too quickly.
Largely because of this expiration of the Bush-era tax cuts embedded in it, this “current law” baseline actually shows an extraordinarily rapid decline of deficits and debt in the near- and longer-term (see this quick summary): a return to primary surpluses by 2015, a rapidly falling ratio of debt to GDP, and all public debt fully paid off by 2069. See the red line on the graph below, showing the debt/GDP ratio—does that really look like a scary cliff showing too much debt growth?
It’s obvious why Friedman chooses this particular baseline even when another baseline, more realistic but which would make for much-less impressive numbers for this level of carbon tax as a fiscal savior, is available in the same report (see the figure below). It makes even a too-small carbon tax look like a deficit game-changer to an un-careful reader.
But, this level of carbon tax only cuts a large portion of the projected deficits relative to a baseline where these deficits are already very small and shrinking.
Worse, Friedman assumes that every penny of revenue raised by the carbon tax should just go to reduce the deficit.
Look, we like, no, we lurve, carbon taxes. But we think that lots of the revenue raised by them should be recycled to hold low- and moderate-income households harmless from what is, after all: a not-very progressive consumption tax. And some more should be spent on energy efficiency investments, the goal of this exercise is, after all, to mitigate carbon emissions. But the case for carbon taxes should rise or fall on their own merits as a device to slow global climate change, and not be bundled in with a lot of baseless fear-mongering about deficits.