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Sequester This: U.S. Consumers Paid a 2.7% Climate Disruption Tax in 2012

Dan Lashof

Posted March 1, 2013

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This post has been revised (March 4th) to reflect comments by Charlie Komanoff from regarding the use of state sales tax rates as opposed to state and local tax rates.

The post was co-written with NRDC Finance Advisor Andy Stevenson

As the sequester begins and Congressional gridlock continues to prevent action to avoid this self-inflicted wound, it’s worth noting that decades of inaction on climate change is contributing to an even larger hit on the U.S. economy.

2012 was a brutal year for climate-related disasters in the US with droughts, super storms, tornadoes, and forest fires killing 349 people and causing an estimated $139 billion in damages. Damage to our economic wellbeing large enough to take nearly 1% off our GDP in 2012 and eclipse the economic pain contemplated under the coming $85 billion sequestration by a significant margin.

Here’s the data from AON Benfeld, Macroeconomic Advisors:


Obligatory disclaimer: We don’t know what portion of these costs can be attributed to climate change, but we do know that smoking causes cancer and carbon pollution fuels more extreme weather.

While 2005 still ranks as the worst year for climate related disasters, taking over 2,000 lives and costing the U.S. economy $187 billion in today's dollars, 2012 will likely go down as causing more damage in more states (46 states) than any other since NOAA began keeping records. In fact, the combined cost of these climate events was so great in 2012 that they equate to roughly half (47%) of all sales taxes received by all U.S. states in that year.


Indeed, if the damage from these climate disasters had to be fully funded by a climate disruption tax, paid in each state as if it were a sales tax, in aggregate the average U.S. sales tax would have risen by 2.7 percentage points in 2012.


Furthermore, given that climate disasters have affected some states more than others, the Climate Disruption Tax paid by individual states varies greatly. For example, if cost estimates for each climate disaster were allocated by population density (or by farm input costs as has been done here in the case of the drought), we get a general overview of how these costs would be allocated as a sales tax across states.


As one would expect, the Climate Disruption Tax rates for New Jersey was the highest in the country last year at around 25%. The next tier of states (Nebraska, Kansas, and Iowa) may be a bit more surprising, however, as these states didn't suffer from one large event like Superstorm Sandy, but instead from a series of smaller events that cost roughly double what these states received in sales tax revenues. 


In this context, climate disruption costs can be seen to have already raised our effective tax rates by a significant amount in 2012. Furthermore, unlike sales tax revenues that are used by the state to fund nearly 30% of their budgets, the Climate Disruption Tax is a dead weight loss to our economy that helps no one.

Clearly in an environment where tax hikes are a non-starter for many politicians, actually requiring states to fund their own climate disaster recoveries with a pay-go Climate Disruption Tax is highly unlikely,  however, as a measure of actual costs borne by the states this is a useful metric.

Indeed, if these climate related costs were included as an additional sales tax, sales tax rates in a state like New Jersey would look a lot like Sweden's and businesses would rightly consider them a competitive disadvantage.



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Jan FreedMar 6 2013 08:12 PM

I have heard the argument that the increased costs of extreme climate are simply due to the fact that we have more people and more stuff than we did before, so bad weather simply costs more.

A study of the ratios between Weather damage/ collected sales taxes would settle that question. Sales taxes are a reflection of population and prosperity levels and so act as a "control".

I would wager that the ratio (weather damage/sales tax) has gone up in the last few decades. Sales taxes too would show an upward trend, but not at fast as weather damage. The ratios would probably, therefore, increase say, from 1960-2012.

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