The climate-change issue has divided conservatives, with presumptive Republican presidential nominee John McCain leading the charge for a cap-and-trade energy-rationing scheme and Oklahoma Sen. James Inhofe spearheading the opposition — which includes my group, Americans for Prosperity, and most movement conservatives. Building a consensus on the issue looks complicated, but it’s as simple as one word: taxes. We should build from the premise that climate policy must not be used as a cover for raising federal revenue.
The Washington Post recently called the phrase cap-and-trade “a pithy marketing gimmick,” because it obscures the sprawling regulatory scheme that would be created and the real costs it imposes on energy consumers. Harvard professor Greg Mankiw, former chairman of the Council of Economic Advisors and a supporter of environmental taxes, has explained that cap-and-trade schemes that give away carbon allowances amount to combining a carbon tax with corporate welfare.
The nonpartisan Congressional Budget Office has determined that the leading cap-and-trade scheme, the Lieberman-Warner Secure Climate Act, would include a huge tax hike, raising federal revenues an astonishing $1.2 trillion over the next ten years. (It’s really only seven years because the bill’s cap doesn’t take effect until 2012.) It also would increase spending by about the same amount, partly in the form of valuable allowances given to the very same companies whose emissions are targeted for reduction. The bill includes no tax cuts.
Many in the energy industry support the bill because the costs, according to the CBO, are passed on almost entirely to energy consumers, while the benefits, in the form of free allowances, accrue largely to energy companies and their shareholders, as well as a wide variety of politically favored special interests.
The politically convenient fiction that this kind of cap-and-trade is anything but a tax hike must be laid to rest. Meanwhile, a new conservative consensus should agree that any climate-change policy should be revenue neutral. Revenue neutrality requires auctioning all of the permits, not giving them away as subsidies, and using the revenue, dollar for dollar, to cut taxes.
Sen. Judd Gregg, ranking member of the Senate Budget Committee (and a co-sponsor of a different cap-and-trade bill) stated it well on the Senate floor: “If you are going to shift what amounts to a $1.2 trillion increase in consumption taxes, you ought to use the revenues to reduce income taxes to working Americans by pretty much an equal amount.”
How much income-tax relief could be included in a package with a $1.2 billion cap-and-trade bill to make it revenue-neutral? An approach that might appeal to Sen. McCain would include a deep cut in the corporate income tax. A back-of-the-envelope calculation shows that cap-and-trade tax revenues at the level of Lieberman-Warner could pay for a 47 percent reduction in corporate taxes, slashing the top rate from 35 percent to 18.4 percent. Another option would be to dedicate the revenue to cutting individual income-tax rates, which could be reduced across-the-board by 8.1 percent. The revenue also could be used to triple the child tax credit to $3,000 per child.
Even more important than the initial tax cuts is a guarantee that any climate policy remains revenue neutral over time. Most credible models show the price of carbon allowances, and thus revenue to government, increasing dramatically: An initial $1.2 trillion would be followed by many additional trillions in future decades. So a revenue-neutral climate bill would have to include provisions to automatically direct proceeds toward tax reductions.
Of course, there’s little chance any of this will fly with the Left. But conservatives who offer this approach in good faith and are rebuffed will have proof that feel-good environmentalism is being used as a cloak for a dramatic expansion in the size and scope of government — not to mention your tax bill.