An Austrian Critique of Using Carbon Taxes to Manage Climate Catastrophe Risk

Abstract

Revising and extending the neoclassical rationale for pollution taxes, some economists have attempted to justify a carbon emissions tax as a way for the state to manage systemic climate risks for society. Deploying an approach to risk management commonly seen in financial markets, they depict a tax on carbon-based energy as a hedge against climate catastrophe. The Austrian school of economics has illuminated the conceptual defects of the neoclassical framework around welfare economics, market failure, negative externalities, and socialist economic planning generally. The risk management rationale for carbon taxes suffers from the same calculation and knowledge problems that encumber other state-centric schemes. This article critiques the proposed use of carbon taxes as climate risk insurance on the grounds that systemic risks are not insurable. Moreover, future climate costs cannot be calculated due to their subjectivity, the passage of time, and the absence of demonstrated preferences regarding property values. Both climate risk models and carbon tax cost-benefit models employ flawed assumptions and utility functions. This article proposes a strategic shrinking of the state’s role in economic affairs and a return to sound money as superior ways to mitigate a society’s climate disaster risks.