Test the Theory

There are an increasing number of reports about the business community’s growing support for a carbon tax.  Americans for Carbon Dividends, CERES, and the CEO Climate Dialogue along with several environmental groups are urging Congress to pass legislation that would put a price on carbon—CO2 emissions.

According to Axios, 69% of republicans are concerned that “their party’s position on climate will hurt them with younger voters and 43 % …said that their concern about climate change has increased in the past year.”  David Doniger at the Natural Resources Defense Council told Axios…“They see a rising public demand for action and they’re smart enough to know this extreme denial of the Trump era will not last and may be coming to a halt in 2020.”

Maybe they are right and a turning point has been reached but don’t bet on it.  The recent election in Australia is one piece of evidence.  Voters there had a clear choice between pro-growth policies and policies of higher taxes and income distribution.  Growth won.  One way to test the public’s receptiveness for a carbon tax is for Congress to propose and try to pass something like a 25 or 50 cent increase in the gasoline tax since that would apply directly to CO2 emissions.

The reason for skepticism is the reality of how voters are reacting to proposals to raise state gasoline taxes.  Proposals in Ohio, Missouri, and Minnesota for example have run into to fierce resistance from voters.

A study by two European economists captured the reality well.  Given concerns about climate change, “the option of raising gasoline taxes has received greater consideration in the American public policy debate. Gasoline tax increases remain nevertheless highly unpopular. Public resistance to them is at least partly explained by their adverse distributional effects. In developed economies gasoline is generally a necessity good in household consumption. Therefore, gasoline price increases tend to affect the poor more than the wealthy in relative terms. That is, they tend to be regressive.”

While the rhetoric surrounding a carbon tax might initially produce public support, especially given promises returning some proceeds to individuals in the form of cash dividends, the realities of carbon taxes can only be hidden for so long.  The public would soon realize that the taxing mechanism would give Congress another way to feed its spending appetite, would not be as simple and straight forward as promised, and would be gamed by crony capitalists.

So, if Congress can get the public to buy into a gasoline tax increase that would set predicate for moving onto a carbon tax in spite of the fact that it is a scam.  The impact on global CO2 emissions would be trivial since they are increasing as a result of coal fired power units being built by China, India, and other countries while US emissions peaked in 2005. 

A Time of Greater Peril?

The majority of democrats running for president have embraced the Green New Deal or something like ot to address the claimed impending climate catastrophe. Vice President Biden got roundly criticized when it was suggested that he would propose a moderate climate agenda—rejoin the Paris Accord, promulgate emission reduction regulation, and support nuclear power, and natural gas. He quickly backtracked and now is promising an environmental revolution.

The fact that these people are babbling no nothings doesn’t mean much when the climate narrative is being pushed more aggressively than ever. Senator Schumer wants to keep the focus on climate because it is the one issue where democrats are seen to have a big advantage for the 2020 elections.

A poll by Engagious and Focus Pointe Global found general agreement that weather is getting weirder and that President Trump should do more on clean energy innovation and carbon emission reductions. According to Axios a “poll by the Yale Program on Climate Change and George Mason University found that the “alarmed” segment of the American public is at an all-time high of 29% — double the size in a 2013 survey.” These results are not surprising given media coverage, regular “science” reports and the media conflating extreme weather with climate change.

Support in polls is not surprising since polls can be structured to produce almost any result and climate change is being talked about more than almost any time in the last two decades. The strength of public opinion will be tested when the price tag on Green New Deal like actions is better known along with climate facts.

As proponents and many economists discovered several decades ago when they were championing Contingent Valuation to assess the value of environmental values, there is a big difference between what people say they are willing to do or accept and how much they are willing to actually pay. Look at the public reaction to proposals to raise the gasoline tax. As the price of actions favored by democrat candidates becomes more apparent and as people better understand the disconnect between model results as policy drivers and the real climate system, their level of support and enthusiasm are likely to shrink.

The reason that this is a time of greater peril is the fact that republicans do not have a credible alternative to the progressive’s narrative. What could such an alternative consist of?
• To the extent that CO2 emissions are a problem, the problem is a global one that won’t be solved as long as China, India, and other countries continue to rely on coal for electric power generation. Increased exports of energy technology could cost-effectively reduce emissions
• Nuclear power can be an important source of future energy if the problems of cost and public fear can be addressed.
• Any barriers to natural gas replacing coal need to be removed,
• The Dutch have demonstrated that there are practical solutions to the problem of sea level rise.
• Increasing R&D on energy and mitigation technologies.
• Focusing research on areas where it is clear that there are real problems in understanding climate change—reducing the range for estimated climate sensitivity, improving our understanding of natural variability and solar impacts, determining if it is possible to make climate models more accurate, and correcting the well documented problems with temperature and weather data.

None of these actions or others that could be added are attention grabbers are easily achieved but they demonstrate that the alternative is not a radical agenda that is economically destructive or doing nothing. Polarization is the enemy and the real reason why common sense, scientifically defensible policies are not being pursued.

The End of the Oil Age Keeps Getting Postponed

Oil production in the Permian Basin dates back to the 1920s although production data from the Texas Railroad Commission only goes back to 1940 when production reached 84 million barrels annually.  The Permian Basin is one of the oldest as well as one of the largest and thickest deposits of sedimentary rocks in the country, covering the western part of Texas and eastern portion of New Mexico.

Annual production grew to about 550 million barrels in 1957 and then began a decline that took about a decade to get back to the 1957 level.  It continued to increase and didn’t peak until about 1975 when it hit 750 million barrels.  The 70s were a time of price and wage controls and a belief that domestic oil production was on the verge of exhaustion.  By 1998, oil production had fallen to less than 400 million barrels annually.  

Today, as a result of horizontal drilling and “fracking”, production has reached almost 4 million barrels a day meaning that  it exceeds its 1975 production peak in a little more than 6 months. Not only has technology unlocked a tremendous amount of output, it has also helped to lower the breakeven cost per barrel from $60 to $33.  This will permit high levels of production under any realistic crude oil price scenario.

EIA’s Annual Energy Outlook projects continued increases in domestic production rising above 15 million barrels per day by 2022 and staying above 14 million all the way to 2040.  The main driver—the Permian Basin.  At the beginning of the 21stcentury, most oil and gas companies believed that Permian was past its prime and were shifting investments to more promising areas.  That has all changed thanks to advances in technology.

Renewable fuel and climate change advocates like to assert that the oil and gas industry is going the way of the horse and buggy.  A survey by the UK Sustainable Investment and Finance Association claims that there is “there is growing consensus of the threat of climate change-related financial risks to investments in Integrated Oil Companies unless they change their business model within 10 years. In spite of predictions that the end is near, energy companies are demonstrating that science and engineering will continue to make oil and gas fuels of choice for decades to come.  The threat is not wind, solar, and electric vehicles, it is wrong headed government policy predicated on a climate catastrophe that is always in the distant future.

Muddle Thinking

Democrats running for President are selling a narrative of growing income inequality that is being exacerbated by the Trump tax cuts, deregulation, a favoritism toward big business. There is what I call a political truism—the stronger the rhetoric, the weaker the factual foundation. The media rarely challenges these assertions or drill down to discover underlying facts. If it did, it would discover that the allegation contains a lot of sloppy work that embellishes the reality. Income inequality is not a myth, but the reality is not well defined, nor is how much is too much. If we can’t accurately answer those two issues, we’ll never find an answer.

Income inequality is inevitable and some forms are accepted without question. Gardeners make a fraction of what professional athletes make. So, what is the dividing line between acceptable inequality and unacceptable? Democrat candidates will never articulate an acceptable level but forcefully assert that today’s situation is unacceptable.

What do we know about income inequality and the underlying data?

In an article, Never Mind the 1 percent, Let’s Talk About the 0,01 Percent, Howard Gold makes the following points.” Some argue that income needs to be distributed more equitably, while others say governments should focus less on taking actions that could inhibit top earners and more on addressing the reasons others aren’t as successful. … As the debate continues, members of the 0.01 percent continue on their course.” According to the Tax Foundation, about 1.4 million tax returns were filed by the top 1%, meaning that the top 0.01% represented about 14,000 returns. To qualify for the top 0.01%, someone needs to earn about $2 million annually.

Economists who have studied data pertaining to the top 0.01% whose income has risen faster than the rest of the 1% have concluded that they “are most likely benefiting from what economists call “skill-biased technological change”—the increasing return on certain skills in an economy driven by technology and globalization.” Under established theory, a shortage skills in-demand will raise the price of those skills. Professional athletes and celebrity entertainers would have little trouble exceeding the $2 million entry point. I doubt that Elizabeth Warren and her fellow confiscator candidates would openly advocate tax penalties on Tom Brady, Tiger Woods, Tom Hanks, or Angelina Jolie. It’s the other unnamed rascals that they are after, whoever they are. But that does nothing to improve the lives and well-being of those in the middle and low income categories.

Two major factors contributing to income inequality are technology and globalization. Technology contributes to economic growth by increasing labor efficiency. But it also makes some employees less employable as technology substitutes for labor. Training and education helps mitigate the adverse effects of technology. And, globalization obviously results in companies outsourcing some production because they can get goods at a lower cost.

Although income inequality is real, its extent is being exaggerated by data problems and analyses relying on that data. The Congressional Budget Office report, The Distribution of Household Income, 2014, provides a detailed examination of income inequality by assessing virtually all changes to after-tax government benefits. Government redistribution of hundreds of billions of dollars from taxes on the rich to low income households is minimized in discussions of inequality. It concluded, “Under the adjustments, the top 10 percent income share seldom strays more than 5 percentage points away from a century-long average of about 35 percent.”

In addition, Phillip Magness in his paper The Myth of Spiraling Inequality pointed to the impact of flawed and outdated statistics—”… the widely reported explosion of inequality in the past three decades is likely a myth built upon outdated and flawed statistics. … These problems are sufficiently severe that they call into question the accuracy of the century-long inequality pattern at the heart of the U.S. policy discussion.”

Although income inequality is not a myth, it is likely far less severe than asserted by candidates for president. Debate would be better served by focusing first on the accuracy of measurements, the quality of data used in assessing inequality, and realistic policies that can help to lessen it..