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Commentary


Stern Report: Stern Taxes, Steep Price for Consumers

January 10, 2007
By Sam Batkins

For Americans who aren't eager to open their W-2's yet and prepare for another laborious tax season, a new report might make paying taxes all the more burdensome. The report wasn't issued by any among the litany of alphabet soup agencies in Washington, but by Her Majesty's Treasury Department in England. Known as the Stern Report, it details the current impact of climate change and what is needed to abate levels of carbon dioxide emissions that are deemed hazardous. Although it does recommend incentives for energy innovation and removal of barriers to energy efficiency, the Stern Report also calls for steps that would devastate taxpayers.

The report's recommendations are especially sweeping, by explicitly endorsing price controls for the cost of carbon emissions and contending that "taxes can set the global price of greenhouse gases, and emitters can then choose how much to emit." This statement is suspect, because taxes are by definition compulsory ... there is little "choice" involved. When money is taken from individuals and firms, they have less to spend, save, and invest, which affects other businesses, consumers, and employees.

Price controls-i.e., imposing a cap or a floor on costs of goods and services- have been attempted since the dawn of human commerce and produce similar adverse effects. President Nixon's policies provide one example of this disastrous history. From the institution of wage and price controls in 1971 to their end by 1974, inflation of U.S. prices had more than doubled, reaching a perilous 11 percent annually.

Whether through taxes or price controls, the Stern Report concedes that its agenda would deliver an economic shock. "Trying to abate rapidly in the short term-when the capital in industries emitting greenhouse gases is fixed and technologies are given-can quickly become costly for firms, as the marginal cost of abatement is likely to rise sharply." So just what are these costs?

The Congressional Budget Office (CBO) issued a report in 2002 on policy initiatives that could curtail gasoline consumption. One of the proposed ideas was a modest 4.3-cent gas tax increase. CBO calculated that this increase would result in an average yearly increase of $44 for consumers in low-income states. Imposing the carbon- control policies of the Stern Report on a national scale would, according to the Cato Institute, cost approximately $1,154 per household in the United States: a steep amount for most consumers who are already contending with high energy prices.

CBO estimated that the lowest income decile spends an astounding 11.4 percent of their income on gasoline, mostly in rural areas where public transportation is scarce. Artificially rigging higher prices at the pump would only worsen this burden on those who are least able to cope.

On a national and transnational scale, the expense is much higher. The report notes, "Ultimately, stabilization-at whatever level-requires that annual emissions be brought down to more than 80% below current levels." What are the costs of such a drastic, and some would say untenable, reduction? According to the report, costs to the global economy could reach upward of 2 percent of GDP by 2050 - a seemingly small share that would actually amount to over $266 billion this year (and much more in the future). And with a new study from the United Nations showing that livestock contribute a larger share of greenhouse gas emissions than transportation, this expense may be for naught.

Few could argue that the Stern Report is deceptive. It explicitly suggests that drastically curtailing C02 emissions through price controls and taxes will have profound economic consequences, yet that is precisely what it recommends. U.S. policymakers who want to grapple with global warming should give most of the Stern Report a cold shoulder. Taxpayers, already stressed over April 15, will be grateful.