Carbon Tax? You’re already paying one!

One of the measures I’ve long argued in favour of is that of a Carbon Tax. As I’ve highlighted before, the reality is that much of the reason we need to subsidize renewables is borne out by the absurd subsidies given to fossil fuel based consumption (which vastly exceed those given to renewable sources). It would seem logical to me to instead tax fossil fuels thus reducing the need to spending tax payer’s money on renewable subsidies.

Figure 1, Maybe Tea Party plans to get rid of FEMA need a rethink!

Indeed, as this video from the US based Natural Resources Defence Council illustrates increasingly the biggest of the subsidies to fossil fuels is the right to pump climate changing gases into the atmosphere without having to pay for the consequences. And as the NRDC points out there has been an enormous rise in the amount spent in recent years on the costs of paying for natural disasters in America.

Last year the US spent $139 Billion on repairing flood and storm related damages ($50 Billion in damages related to hurricane Sandy alone). Now you may well say, but isn’t this why we have insurance companies for? However, only about 27% of all flood related damages in the US is paid for by private insurance. The rest comes from the National Flood Insurance Fund (a sort of government sponsored insurer of last resort), FEMA, not to mention state and national level budgets. After all it wasn’t the insurance industry who paid for the NY subways to be pumped out post Hurricane Sandy!

Figure 2 – Who pays for floods in the US

That would represent roughly 1% of all US government spending or if that were a tax it would amount to a 2.7% increase in sales and VAT related taxes on all business conducted in the US. And that’s just the cost of paying for the clean-up. Building of flood defenses (via the US Army corps of Engineers) comes under a separate budget heading. And with rising sea levels it’s increasingly likely that cities such as Miami, Boston or New York will need elaborate flood defenses constructed around them to protect them from future extreme weather events. A cost that will be borne by future generations of tax payers.

Now while it’s important to point out the dangers of trying to link any one climate event to climate change. But certainly the increasing “extreme weather” events recorded worldwide (and the heavy clean up costs they impose) are entirely consistent with climate change. And we can only expect these costs to rise as time goes on.

Worse still, the share of that cost borne by the Government rather than private insurers will inevitably increase, as discussed by Ike Brannon of the R street Institute. Indeed its worth noting that the insurance industry (who are a major sponsor of the R street Institute) are terrified of climate change. And with good reason. Climate enhanced flood events is directly impacting on their bottom line. Increasingly they have had to stop providing flood insurance to many customers in flood risk areas (a situation not helped by ridiculous “king Canute” like behavior by Republican state legislators such as those in North Carolina) or drastically put up the premiums to the point where many simply can’t afford them.

While this means less payouts out the door, it means less premiums in the door (and the insurance industry survives by making money off the difference between these two figures). Which means essentially the insurance industry is facing the risk of going through a massive phase of downsizing in the future. From their point of view the climate deniers are essentially asking them to mortgage their future as an industry as a giant un-hedged bet that all the climate scientists are wrong and unsurprisingly the insurance companies don’t seem terribly keen on doing that!

Thus I would argue it is not that absurd to question whether it would not be more sensible to insist that users of fossil fuels should pay at least some of the costs that their live style choice imposes on government. A modest carbon tax would both provide a much needed stream of revenue with which governments can offset the costs imposed on them to deal climate change and serve to make renewable energy more economically competitive.

What the critics of a carbon tax are essentially arguing for is more government handouts, run up on Uncle Sam’s already battered and worn credit card.