A Carbon Tax Is Still a Bad Idea

For the second time since the last election, there’s a growing effort to impose a carbon tax on Americans. Once again, this effort is being led not by the environmentalist left, but by conservative organizations and a small group of Republican legislators.

The timing is certainly interesting, given that the United States posted the largest year-over-year decline in greenhouse gas emissions of any advanced economy according to the International Energy Agency’s annual survey of global carbon greenhouse gas (GHG) emissions and has now seen emissions fall for three consecutive years. 

Unimpressed with the changes, a coalition — featuring some scholars at the American Enterprise Institute (where there is a vigorous internal debate over carbon taxes) and the R Street Institute — recently argued that conservatives and free market advocates should embrace carbon taxes if these taxes are used to replace existing regulations. These groups aren’t the first to make that case.

One Tax for Another

When the Climate Leadership Council — which features veterans of past Republican administrations like former Secretary of State James Baker, former Treasury Secretary Hank Paulson, and economist Greg Mankiw — sought last year to convince newly sworn-in President Trump of the wisdom of a carbon tax, it made similar arguments.

It’s worth noting how so much of the free market case for the tax has evolved over the years. It moved from a Pigouvian externality tax to reduce GHG to “desirable levels” to various versions of “Look at all the stuff we can do with the revenue from a carbon tax.” First, there were calls for trading the carbon tax for the corporate income tax or other distortionary taxes. Then came the calls for trading the tax for lower regulations. Then there was the case for using the revenue for more spending on conservative pet programs like the Earned Income Tax Credit.

The latest proposal comes from Florida Republican Congressman Carlos Curbelo, who introduced a bill this week that would replace the gasoline tax with a carbon tax. It is notable as it happened in the tailwind of the House GOP overwhelmingly passing a nonbinding measure calling a carbon tax “detrimental” to the United States.

Curbelo’s proposal isn’t unique in that it too would trade in one tax for another. It shares another characteristic with the other “free market” proposals, one much less flattering. None of the proposals, whether taxes or regulations or subsidies, pretend to make any measurable difference on temperature reduction, which one would think is the primary goal. Writing about the Curbelo plan, AEI’s Benjamin Zycher noted, “If we apply the EPA climate model to those emission cuts, the predicted temperature reduction at the end of the century would be 31 one-thousandths of one degree.”

Tax as a Price

Now, assuming that an environmental policy is the goal, I can see why some free-market advocates might potentially find these carbon-tax proposals tempting. Among the range of typical political responses to real or perceived negative externalities, putting a price on them can seem like a market-friendly solution. In the absence of an owner of the atmosphere, the role of pricing carbon-emission externalities falls on the government.

Unfortunately, while these free-market advocates are fast to point to emission externalities, they are slow to recognize the externalities imposed by government interventions, the many risks outlined by public choice economists, and hence the important limitations to their approach.

The standard argument for the tax is that it is more efficient than the regulatory approach because it allows emitters to choose least-cost tools to achieve their mandated emissions reductions. There are problems with this standard textbook argument. For instance, it assumes that the emissions-reduction goal is exogenous — that is, that it is unaffected by the policy tools used to achieve it.

More importantly, there is a real knowledge problem in government that makes it practically difficult for legislators to determine the optimal GHG price. Then there is the fact that politicians are always revenue-hungry. It means that, even if they actually knew the optimal price for carbon emissions, they would have very strong incentives to jack up that tax rate well above the optimal price, making it counterproductive economically (and, by the way, also environmentally). The short time horizon of political decision-makers also means the revenue-maximizing rate in the short run is probably higher than that in the long run, causing added distortions.

Also, what happens if the tax is targeting the wrong thing? What happens if the tax doesn’t yield the expected environmental results or is overly costly? Carbon-tax advocates don’t seem to ask themselves these questions.

As Zycher wrote to me, “Beware of economists pretending to be politicians.  The purported efficiency of a carbon tax is based upon the multiple assumptions that Congress will choose the optimal long-term tax rate, that the attendant environmental benefits would be both positive and worth more socially than the economic costs, and that such policies can be adjusted easily in the face of interest-group pressures to preserve them even given new economic and environmental information.  Merely to state such premises is to refute them.”

Piling Tax on Tax

Finally, raise your hand if you truly believe that swapping out regulations — or the gasoline tax, the corporate income tax, or other ill-advised policies — for a carbon tax will ever happen. Anyone? And raise your hand if you know of a way to make sure future Congresses will not simply reinstate the old taxes, if by some miracle the trade were to be successfully executed today. Anyone, anyone?

To understand the unicorn that the dream of a revenue-neutral carbon tax represents, just look at what progressives say on the issue. Consider David Roberts at Vox, who argues that a carbon tax would need to be “pretty damn high” to impact emissions, and that it’s “irksome” that the focus is on revenue-neutral proposals in which “all the revenue is returned, none left for government spending.” Environmental groups similarly opposed a 2016 carbon-tax initiative in the state of Washington because the revenue would have been used to reduce other taxes instead of to grow government. These guys at least have the merit of being either more realistic or honest.

The bottom line is that right-leaning carbon-tax advocates are pushing a compromise that the other side doesn’t want and wouldn’t find satisfactory. With this reality in mind, it is worth asking: with proposals that show no prospects of significant environmental improvements and carry the risks of massive economic downsides, why is it again that we should support this policy?

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