Other examples could be cited of proponents claiming that British Columbia is one of the prime exhibits that shows that a revenue‐neutral carbon tax can reduce emissions without impairing economic growth.68 Yet we challenge that claim.
One popular 2012 econometric analysis of the BC episode concluded that its carbon tax reduced emissions from gasoline about five times as much as would be expected from comparable, market‐induced increases in gasoline prices.69 The authors hypothesize that the reduced emissions resulted because BC residents are willing to cut back on driving in an effort to mitigate climate change as long as their fellow BC residents can’t free‐ride off their sacrifices. The problem with that notion is that it would indicate very poor reasoning on the part of BC residents: the rest of the world, which is not subject to BC’s carbon tax, can still free‐ride off any BC cutbacks.
A much more plausible explanation for the econometric results is that BC residents are (at least partially) buying gasoline in other jurisdictions. Note that a market‐induced rise in pump prices in British Columbia would not lead to that effect because, presumably, gas prices in neighboring Alberta or Washington State would also be affected by a change in world supply and demand. However, when BC residents see their gas prices rise because of the BC carbon tax, then (other things being equal) we would expect gasoline in other jurisdictions to become relatively more attractive.
Although pro–carbon tax writers have tried to downplay the significance of that possibility, the data do indicate a sharp increase in cross‐border traffic between British Columbia and Washington State after the BC carbon tax was implemented. Figure 4 shows various trends in cross‐border vehicle traffic expressed as an index relative to year 2007 levels.
Figure 4. Select U.S.–Canadian Vehicle Border Crossings, Annual, 1998–2014
As Figure 4 indicates, a pronounced increase in Canadian vehicle crossings of the BC–Washington State border occurred after the carbon tax was introduced in July 2008. The surge cannot be due to, say, changes in the Canadian–U.S. dollar exchange rate because we don’t see nearly the same rise in Canadian vehicles returning to either Canada as a whole or Ontario in particular. Vehicles returning to British Columbia were up 136 percent in 2013 relative to 2007 levels, whereas in Ontario they were up only 22 percent. The actual number of returning BC vehicles was 3.2 million in 2007 and 7.6 million in 2013, compared with a total BC population of about 4.6 million in 2013.70 Furthermore, the surge can’t be due to changes in border flexibility, as some have suggested, because we don’t see nearly as much of a relative surge in U.S. traffic at the BC border relative to other checkpoints.
Another significant point is that, even if not a statistical artifact, the apparently large reduction in BC emissions proved to be temporary. The studies trumpeting the potency of BC’s carbon tax went only through 2012 data. However, officially reported BC gasoline sales increased sharply in 2013 and 2014, such that as of 2014 annual per capita BC gasoline sales were down only 2 percent compared with 2007, only a percentage point lower than the rest of Canada.71 See Figure 5. On this criterion it seems British Columbia’s carbon tax had a very weak long‐term effect on gasoline consumption, even if we ignore the significant leakage problem.
Figure 5. Per capita Official Gasoline Sales in British Columbia vs. Rest of Canada, Annual, 2005–14
The claim that British Columbia’s carbon tax did not harm the conventional economy—because BC growth has matched overall Canadian growth since 2008—ignores the fact that the BC economy was outperforming the rest of Canada before the carbon tax. Specifically, from 2003 to 2008, BC real output grew by a cumulative 18.6 percent, whereas Canadian real GDP grew by only 12.7 percent. In contrast, from 2008 to 2013 (the latest annual figure available), BC output grew by 8.0 percent, whereas Canadian output grew by 7.7 percent.72
We see a similar pattern in the labor market. In the five years before introduction of the BC carbon tax, the average unemployment rate in British Columbia was 5.6 percent, compared with a Canadian average of 6.6 percent. But, in the five years after the BC carbon tax began, the average unemployment rate in British Columbia was 7.1 percent compared to 7.6 percent in Canada overall.73 Thus the labor market advantage of British Columbia versus Canada was cut in half if we look at the five‐year periods before and after introduction of the BC carbon tax. See Figure 6.74
Figure 6. Unemployment and Real Growth Rates, Annual Averages, British Columbia vs. Canada, 2003–13
Source: Unemployment data are from Statistics Canada, Table 282–008, “Labour Force Survey Estimates (LFS), by North American Industry Classification System (NAICS), Sex and Age Group,” http://www5.statcan.gc.ca/cansim/a26?lang=eng&id=2820008; economic data are from Statistics Canada, Table 384‑0038, “Gross Domestic Product, Expenditure‐based, Provincial and Territorial,” http://www5.statcan.gc.ca/cansim/a26?lang=eng&id=3840038.
As a final twist, we note that BC authorities report that they actually (and apparently unintentionally) provided net tax cuts in conjunction with the revenue‐neutral carbon tax, presumably because they did not anticipate the sharp fall in gasoline sales in the region.75 In other words, they gave too‐generous tax cuts because they assumed the carbon tax receipts would be higher than those ultimately realized. The BC tax cuts took the form of rate reductions and lump‐sum payments (the latter directed to low‐income groups that would be especially harmed by rising energy prices). Proponents note that the BC carbon tax swap has yielded the lowest personal income tax rates in Canada, but that describes the average effective rates. What really matters is the marginal tax rate, which indicates how much a taxpayer is assessed for an additional unit of labor or income. In 2014 British Columbia had six income tax brackets, ranging up to 16.8 percent, whereas neighboring Alberta had a flat income tax of 10 percent.76 The notion that British Columbia is now an economic powerhouse because of its carbon tax and offsetting adjustments to the tax code is far from reality.
In summary, when we look at British Columbia—the hands‐down best real‐world example of a carbon tax swap, according to proponents—we find that even the official figures show that British Columbia has had only a modest reduction in gasoline consumption relative to the rest of Canada, and those official figures appear to show significant leakage into other jurisdictions. That may have led authorities to provide larger tax cuts than they had intended. Furthermore, British Columbia’s offsetting tax cuts were not designed solely to encourage labor and economic growth because they included lump‐sum transfers to low‐income groups. Indeed, in practice the evidence suggests that, even with the associated net tax cuts, BC unemployment and real economic growth rates suffered after the carbon tax was enacted. Inasmuch as any U.S. carbon tax will not be revenue neutral—let alone be phased in with net tax cuts—the BC example leads us to expect modest changes in gas consumption in exchange for a weaker economy.
Many Americans believe that the U.S. government must adopt aggressive policies to slow greenhouse gas emissions. A handful of vocal intellectuals and political officials are now encouraging libertarians and conservatives to consider a win‐win tax‐swap deal that ostensibly would give them desired reductions in other taxes and regulations in exchange for conceding to a carbon tax.
This study has shown just how dubious that popular narrative is. Indeed, many proponents of a carbon tax are denying a growing body of low‐sensitivity findings as well as a large and growing discrepancy between climate model predictions and temperature observations in the lower atmosphere. Furthermore, relying on standard results in the economics of climate change literature, we have shown serious problems in the estimation of the SCC. We have also shown that, even if we knew the SCC, other considerations would imply a significantly lower optimal carbon tax.
Of particular relevance to libertarians and conservatives, we have further shown that the tax interaction effect suggests no double‐dividend boost to conventional economic growth, even if a carbon tax were fully refunded through payroll tax cuts or lump‐sum payments. In the more realistic scenario in which a carbon tax would be only partially refunded, the results aren’t even close: such a tax would clearly hurt the conventional economy, meaning that it could be justified only on environmental grounds.
Finally, critical analysis of the real‐world carbon tax experiences in Australia and British Columbia show that the promises of a market‐friendly U.S. carbon tax were violated in both scenarios. Even in the case of British Columbia—hailed by carbon tax advocates as the best example to date of such a policy—after an initial drop the tax has not yielded significant reductions in gasoline purchases, whereas it has apparently reduced the BC economy’s performance relative to Canada.
Libertarians and conservatives in particular should not simply trust the assurances from the advocates of a carbon tax but should instead read the relevant literature themselves. In both theory and practice, a U.S. carbon tax remains a very dubious policy proposal.
The authors gratefully acknowledge David R. Henderson and Jeffrey Miron for comments on an early draft, and Jim Manzi and Philip Cross for providing references.
1. The original social cost of carbon estimates from the Obama administration were published in Interagency Working Group on Social Cost of Carbon, “Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis—Under Executive Order 12866,” February 2010,
http://www.epa.gov/oms/climate/regulations/scc-tsd.pdf. A major update to the estimates was issued in May 2013, “Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866,”
https://www.whitehouse.gov/sites/default/files/omb/inforeg/social_cost_of_carbon_for_ria_2013_update.pdf. As of this writing, the latest estimates were released on July 2015: “Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis under Executive Order 12866,”
2. See the Office of Management and Budget Circular A-4 (September 17, 2003) regarding regulatory analysis.
3. Interagency Working Group on Social Cost of Carbon, “Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis—Under Executive Order 12866,” p. 11.
4. T. Havranek et al., “Selective Reporting and the Social Cost of Carbon,” Energy Economics (2015), doi:10.1016/j.eneco.2015.08.009.
5. Interagency Working Group, “Technical Support Document,” May 2013 revision,
6. For example, N. Lewis and J. A. Curry, “The Implications for Climate Sensitivity of AR5 Forcing and Heat Uptake Estimates,” Climate Dynamics 45 (2014): 1009–23, doi:10.1007/s00382-014‑2342-y. See also A. Otto et al., “Energy Budget Constraints on Climate Response,” Nature Geoscience 6 (2013): 415–16.
7. For example, A. Schmittner et al., “Climate Sensitivity Estimated from Temperature Reconstructions of the Last Glacial Maximum,” Science 334 (2011): 1385–88, doi:10.1126/science.1203513; J. C. Hargreaves et al., “Can the Last Glacial Maximum Constrain Climate Sensitivity?” Geophysical Research Letters 39 (2012): 24702, doi:10.1029/2012GL053872.
8. J. D. Annan and J. C. Hargreaves, “On the Generation and Interpretation of Probabilistic Estimates of Climate Sensitivity,” Climatic Change 104 (2011): 324–436.
9. For example, N. Lewis, “Does ‘Inhomogeneous Forcing and Transient Climate Sensitivity’ by Drew Shindell Make Sense?” Climate Audit, March 10, 2014,
http://climateaudit.org/2014/03/10/does-inhomogeneous-forcing-and-transient-climate-sensitivity-by-drew-shindell-make-sense/; T. Masters, “On Forcing Enhancement, Efficacy, and Kummer and Dessler,” Troy’s Scratchpad, May 9, 2014,
https://troyca.wordpress.com/2014/05/09/on-forcing-enhancement-efficacy-and-kummer-and-dessler-2014/; N. Lewis, “Marotzke and Forster’s Circular Attribution of CMIP5 Intermodel Warming Differences,” Climate Audit, February 5, 2015,
10. P. J. Michaels and P. C. Knappenberger, “‘Worse than We Thought’ Rears Its Ugly Head Again,” Cato at Liberty, January 6, 2013,
11. G. H. Roe and M. B. Baker, “Why is Climate Sensitivity So Unpredictable?” Science 318 (2007): 629–32.
12. “Summary for Policymakers,” Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, eds. T. F. Stocker et al. (Cambridge, UK, and New York: Cambridge University Press, 2013), p. 16,
13. N. Lewis and M. Crok, “A Sensitive Matter: How the IPCC Buried Evidence Showing Good News about Global Warming,” Global Warming Policy Foundation, 2014,
14. A. Otto et al., “Energy Budget Constraints on Climate Response.”
15. P. J. Michaels and P. C. Knappenberger, Lukewarming: The New Climate Science That Changes Everything (Washington: Cato Institute, 2015); B. Stevens, “Rethinking the Lower Bound on Aerosol Radiative Forcing,” Journal of Climate 28 (2015): 4794–4819; N. Lewis, “Implications of Lower Aerosol Forcing for Climate Sensitivity,” Climate Etc., March 19, 2015,
16. Robert Pindyck, “Climate Change Policy: What Do the Models Tell Us?” Journal of Economic Literature 51 (2013): 5,
17. Interagency Working Group, “Technical Support Document,” July 2015 revision,
18. For a comprehensive discussion of the SCC and discount rates, see the Institute for Energy Research’s “Comment on the Technical Support Document,” submitted to the Office of Management and Budget in February 2014,
19. For example, Interagency Working Group, “Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis under Executive Order 12866,” February 2010, Figure 1A,
20. Some standard references showcasing various perspectives in the discounting literature are Robert C. Lind, ed., Discounting for Time and Risk in Energy Policy (Washington: Resources for the Future, 1982); and Paul R. Portney and John P. Weyant, eds., Discounting and Intergenerational Equity (New York: Resources for the Future, 1999).
21. S. Waldhoff et al., “The Marginal Damage Costs of Different Greenhouse Gases: An Application of FUND,” Economics: The Open‐Access E‐Journal, no. 2014–31 (2014), http://www.economics-ejournal.org/economics/journalarticles/2014–31.
22. John Christy, University of Alabama, Huntsville, Testimony before the Committee on Science, Space, and Technology, U.S. House of Representatives, February 2, 2016.
23. It is true that, in the text to this point, we have seriously questioned the accuracy of IAMs such as Nordhaus’s DICE model. However, we are merely illustrating the quantitative significance of “leakage” in terms of the standard models themselves, to show that even on its own merits, the case for a U.S. carbon tax is weaker than the public has been led to believe.
24. William Nordhaus, A Question of Balance: Weighing the Options on Global Warming Policies (New Haven, CT: Yale University Press, 2008), p. 19.
25. The calculator is available at
http://www.cato.org/blog/current-wisdom-we-calculate-you-decide-handy-dandy-carbon-tax-temperature-savings-calculator. The estimate relies on a 3°C climate sensitivity assumption.
26. See O. Edenhofer et al., “Technical Summary,” in Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, ed. O. Edenhofer et al. (Cambridge, UK, and New York: Cambridge University Press, 2014), p. 25,
27. See Intergovernmental Panel on Climate Change, “2014: Summary for Policymakers,” in Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, eds. O. Edenhofer et al. (Cambridge, UK, and New York: Cambridge University Press, 2014), Table SPM.2, p. 15,
28. See Figure 12–40, M. Collins et al., “Long‐term Climate Change: Projections, Commitments and Irreversibility,” Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, eds. T. F. Stocker et al. (Cambridge, UK: Cambridge University Press, 2013), p. 1100,
29. See D. J. Arent et al., “Key Economic Sectors and Services, Supplementary Material,” in Climate Change 2014: Impacts, Adaptation, and Vulnerability. Part A: Global and Sectoral Aspects. Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, eds. C. B. Field et al., Table SM10.2 (2014),
http://www.ipcc.ch/pdf/assessment-report/ar5/wg2/supplementary/WGIIAR5-Chap10_OLSM.pdf; and “Errata in the Working Group II contribution to the AR5,”
30. Roberto Roson and Dominique van der Mensbrugghe, “Climate Change and Economic Growth: Impacts and Interactions,” International Journal of Sustainable Economy 4 (2012): 270–85.
31. Martin L. Weitzman, “On Modeling and Interpreting the Economics of Catastrophic Climate Change,” Review of Economics and Statistics 91 (2009): 1–19,
33. David R. Henderson, “Uncertainty Can Go Both Ways,” Regulation 36 (2013): 50–51,
34. William Nordhaus, “An Analysis of the Dismal Theorem,” Cowles Foundation Discussion Paper No. 1686, January 20, 2009.
35. Bob Inglis and Arthur Laffer, “An Emissions Plan Conservatives Could Warm To,” New York Times, December 28, 2008,
36. Jerry Taylor, “The Conservative Case for a Carbon Tax,” Niskanen Center, March 23, 2015, p. 2,
37. See David Siders, “Jerry Brown Eyes Cap‐and‐Trade Money for High‐Speed Rail,” Sacramento Bee, January 6, 2014,
38. See “RGGI Benefits,” Regional Greenhouse Gas Initiative website,
39. See John Stang, “Inslee Wants to Fund Transportation with a Carbon Tax,” Crosscut,
40. The details of this apparent $695 billion oversight are explained in Robert P. Murphy, “Jerry Taylor Strikes Out (Again) on Carbon Tax,” Institute for Energy Research,
41. See Jerry Taylor, “Should Carbon Tax Revenue Be Used to Retire Debt?” Climate Unplugged,
42. Jared C. Carbone et al., “Deficit Reduction and Carbon Taxes: Budgetary, Economic, and Distributional Impacts,” Resources for the Future, August 2013,
43. Lawrence H. Goulder, “Climate Change Policy’s Interactions with the Tax System,” Energy Economics 40 (2013): S3–11,
45. A commenter on an early draft of this paper pointed out that the effect of higher tax rates is somewhat mitigated if the object of the new tax has a demand that is more inelastic than for the original scenario. The intuition is that deadweight loss occurs when consumers and producers no longer exploit gains from trade on as many units as before. Nonetheless, because the base is smaller on carbon‐intensive activities, we are still comparing a higher tax rate on the relatively inelastic activities to a lower tax rate on the relatively elastic ones. In any event, the consensus of the general equilibrium simulations is that carbon taxes do, in fact, hinder conventional growth more than other common taxes do.
46. A. Lans Bovenberg and Lawrence H. Goulder, “Optimal Environmental Taxation in the Presence of Other Taxes: General Equilibrium Analyses,” American Economic Review 86 (1996): 985‑1000.
47. A commenter pointed out that the table excludes the analysis of recycling the carbon tax receipts through tax rate reductions on capital. This is true, but the point we are making with the table is that the intuition of some pro–carbon tax writers is simply wrong.
48. Bovenberg and Goulder, in “Optimal Environmental Taxation in the Presence of Other Taxes,” explicitly model changes in the deadweight losses from the pre‐existing tax code, to see the effect on optimal carbon taxes. In the case of a stipulated $75 per ton social cost of carbon, our table in the text shows the result that a revenue‐neutral personal income tax (PIT) tax swap implies an optimal $48 per ton carbon tax. This result (we recall) was calibrated to the PIT and other tax rates circa the early 1990s. But Bovenberg and Goulder show in Table 3 of their NBER working paper that, if marginal PIT rates had in fact been 50 percent higher, then the new optimal carbon tax—with full PIT revenue recycling—would drop from $48 to $34 per ton. To repeat, this example shows that the reasoning of many pro–carbon tax analysts is backward: the more distortionary the U.S. tax code is originally, the fewer net benefits that flow from introducing a revenue‐neutral carbon tax.
49. Taylor, “The Conservative Case for a Carbon Tax,” p. 2.
50. William Foster Lloyd, “Two Lectures on the Checks to Population,” Oxford University, United Kingdom, 1833. See also Garrett Hardin, “The Tragedy of the Commons,” Science 162 (1968): 1243–48.
51. David Roberts, “A Libertarian Makes the Case for a Carbon Tax,” Vox, May 13, 2015,
53. Clean Energy Canada, “How to Adopt a Winning Carbon Price,” Centre for Dialogue at Simon Fraser University, Vancouver, British Columbia,
54. David Roberts, “What We Can Learn from British Columbia’s Carbon Tax,” Grist, February 23, 2015,
55. Ian Parry and Roberton C. Williams III, “Is a Carbon Tax the Only Good Climate Policy? Options to Cut CO2 Emissions,” Resources 176 (Fall 2010),
56. Information on worldwide carbon pricing programs taken from Kristin Eberhard, “All the World’s Carbon Pricing Systems in One Animated Map,” Sightline Daily, November 17, 2014,
57. Rob Taylor and Rhiannon Hoyle, “Australia Becomes First Developed Nation to Repeal Carbon Tax,” Wall Street Journal, July 17, 2014,
58. For a list of Alex Robson’s publications, see the Griffith University website,
59. Alex Robson, “Australia’s Carbon Tax: An Economic Evaluation,” Institute for Energy Research, September 2013,
60. Ibid., p. 39.
61. See British Columbia Ministry of Finance, “Carbon Tax,”
62. See British Columbia Ministry of Finance, “Tax Rates on Fuels: Motor Fuel Tax Act and Carbon Tax Act,” Bulletin MFT-CT 005,
63. See British Columbia Ministry of Finance, “Myths and Facts about the Carbon Tax,”
64. For example, the latest British Columbia Budget and Fiscal Plan (2015/16–2017/18) shows on Table 1 (p. 60) its “Revenue Neutral Carbon Tax Report” for the 2013/14–2014/15 fiscal years, detailing the revenues collected and the offsetting tax cuts provided,
65. For a critical discussion of Bauman’s (with Grady Klein) The Cartoon Introduction to Climate Change, see Bryan Caplan’s May 2014 EconLog post,
66. For example, Shi‐Ling Hsu, “A Carbon for Corporate Tax Swap,” Climate Unplugged, January 28, 2015,
67. Yoram Bauman and Shi‐Ling Hsu, “The Most Sensible Tax of All,” New York Times, July 4, 2012,
68. For example, Sustainable Prosperity, “British Columbia’s Carbon Tax Shift: The First Four Years,” Research Report, June 2012,
http://www.sustainableprosperity.ca/sites/default/files/publications/files/British%20Columbia's%20Carbon%20Tax%20Shift.pdf; and “British Columbia’s Carbon Tax: The Evidence Mounts,” The Economist blog post, July 31, 2014,
69. Nicholas Rivers and Brandon Schaufele, “Salience of Carbon Taxes in the Gasoline Market,” SSRN Working Paper, Social Science Research Network, October 22, 2014,
70. Some have argued that the cross‐border statistics do not affect the general lessons of the BC carbon tax episode. For example, Andy Skuce, “The Effect of Cross‐Border Shopping on BC Fuel Consumption Estimates,” Critical Angle, August 18, 2013,
71. Calculations of British Columbia and rest‐of‐Canada gasoline sales are based on Statistics Canada, “Supply and Disposition of Refined Petroleum Products,” Table 134‑0004, http://www5.statcan.gc.ca/cansim/pick-choisir?lang=eng&p2=33&id=1340004. Population figures are from Statistics Canada, “Estimates of Population, by Age Group and Sex for July 1, Canada, Provinces and Territories, Annual (persons unless otherwise noted), Table 051‑0001,
72. Percentages based on chained 2007 Canadian dollars as reported by Statistics Canada.
73. Unemployment data are from Statistics Canada, Table 282‑0087, “Labour Force Survey Estimates (LFS), by Sex and Age Group, Seasonally Adjusted and Unadjusted Monthly (persons unless otherwise noted),”
http://www5.statcan.gc.ca/cansim/a26?id=2820087. The averages are based on the monthly data (i.e., July 2003 through July 2008, and July 2008 through July 2013).
74. To be sure, if one adjusts the period of comparison, this conclusion can change. For example, if one looks at the seven years before and following the July 2008 introduction of the BC carbon tax, then the difference between average unemployment rates in British Columbia versus Canada differs only by a 10th of a percentage point (and in the other direction).
75. For their claim that (to date) the BC authorities had provided at least $300 million in excess tax cuts compared with the new revenues collected from the carbon tax, see Sustainable Prosperity, “British Columbia’s Carbon Tax Shift,”
76. For provincial income tax rates, see TaxTips.ca, “Current Personal Income Tax Rates,”