Drop Energy Subsidies and Impose a Revenue-Neutral Carbon Tax

by Greg Pollowitz

Former Secretary of State George Shultz and Nobel economist Gary Becker argue in today’s WSJ: (behind the paywall)

Why We Support a Revenue-Neutral Carbon Tax

Coupled with the elimination of costly energy subsidies, it would encourage competition.

But their idea is a mess. Some excerpts:


. . .we should seek out the many forms of subsidy that run through the entire energy enterprise and eliminate them. In their place we propose a measure that could go a long way toward leveling the playing field: a revenue-neutral tax on carbon, a major pollutant. A carbon tax would encourage producers and consumers to shift toward energy sources that emit less carbon—such as toward gas-fired power plants and away from coal-fired plants—and generate greater demand for electric and flex-fuel cars and lesser demand for conventional gasoline-powered cars.

How exactly does demand for electric cars increase as electricity from coal-fired power plants makes their cost of ownership go up, not to mention the carbon-tax effects on mining the materials for the “green” car’s battery? And how do “flex-fuel” ethanol powered vehicles become more popular by ending corn subsidies? 

And where to place the tax? That’s to be determined:

The tax might be imposed at a variety of stages in the production and distribution of energy. You can make an argument for imposing it at the point most visible to the population at large, which would be the point of consumption such as gasoline stations and electricity bills. An administratively more efficient way of imposing the tax, however, would be to collect it at the level of production, which would reduce greatly the number of collection points.

Or how much to tax:

The tax should also further increase over time if the apparent severity of the climate effects is growing and, alternatively, the tax should fall over time if the severity appears to be decreasing. Finally, to equalize the present and future burdens, the carbon tax rate should rise over time approximately at the real interest rate (say, the real return on 10-year Treasurys), so that the present value of the burden would be the same to future consumers and producers as it is to present ones.

Who exactly gets to decide if climate effects are growing or decreasing? The above provision makes absolutely no sense. 

Finally, although subsidies will end, there’s still a role for taxpayer-funded science:

A revenue-neutral carbon tax should be supplemented by a reasonable and sustained support for research and development in the energy area. However, we would eliminate any program (loan guarantees, etc.) that tempts the government to get into commercial activities. Clearly, a revenue-neutral carbon tax would benefit all Americans by eliminating the need for costly energy subsidies while promoting a level playing field for energy producers.

“Clearly” this doesn’t make the case for a carbon tax without a whole lot of more information and thought.



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