The Curbelo Carbon Tax as Wealth Redistribution

Environmental policy as a tool of wealth redistribution is nothing new. The latest example is a proposal for a greenhouse-gas (GHG) tax just introduced by Representative Carlos Curbelo (R., Fla.).

Curbelo’s tax would start at $24 per metric ton of GHG emissions, growing 2 percent per year above inflation and an additional $2 per ton every two years if emission-reduction goals are not met. Those goals rise from 29 percent below 2005 levels in 2020 to 33 percent below 2005 levels by 2030. 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.

So this proposal is preposterous as environmental policy regardless of what one assumes about the science and dangers of anthropogenic climate change. But it is serious in terms of wealth redistribution. With a 33 percent reduction, U.S. GHG emissions in 2030 would be about 4.9 billion metric tons; annual revenues from this tax would be $125-$150 billion, 70 percent of which would go to the Highway Trust Fund as a replacement for the federal fuels tax. Revenues from the latter in fiscal year 2016 were about $36.4 billion, so this proposal would double or triple annual federal receipts for the highway fund, to be paid by almost all energy-using sectors rather than the direct beneficiaries of federal highway outlays.

Would the federal government actually be able to spend all those revenues on highway construction? Or is it far more likely that Congress would siphon some large share of the money for numerous purposes beyond the mass-transit boondoggles, bicycle lanes, and other pork already funded by the federal fuels tax? Either way, because the tax would be hidden in the prices of innumerable goods and services, this proposal would reduce the political visibility of the cost of federal highway services.

States would receive 10 percent of the revenues for “low-income” households, the definition of which always allows for political favoritism. Another 5 percent would go to states, cities, and tribes for mitigation of coastal flooding; accordingly, the middle of the country would subsidize the coasts. Is it an accident that Representative Curbelo’s Florida district comprises Monroe County and parts of Miami-Dade County? (As an aside, significant parts of Miami-Dade were built on swamps elevated with fill, which over time is subsiding. Are GHG emissions responsible for that too?)

This proposal is preposterous as environmental policy regardless of what one assumes about the science and dangers of anthropogenic climate change. But it is serious in terms of wealth redistribution.

Curbelo’s legislation would impose a moratorium on enforcement of GHG-emissions regulations under the Clean Air Act through 2025, when the moratorium would be renewed for an additional four years if emissions goals have been met, and again in 2029 for four more years if the same condition obtains, meaning it would end in 2033 at latest. The upshot of this provision is enormous uncertainty about the regulatory environment affecting long-term investments, not a salutary condition for continued economic, employment, and wage growth.

The bill would also impose a border-tax adjustment (tariff) on imported goods equal to the increased costs paid by “comparable U.S. products.” This provision will yield an enormous expansion in the federal bureaucracy, as “comparability” will have to be defined and measured across a vast array of goods. Can anyone believe that political pressures will not affect such computations? Moreover, many other economies also have implemented a wide variety of GHG policies; if they do not receive credits for those costs, then there will be an incentive to move production of goods destined for the U.S. to economies lacking such GHG policies, and it almost certainly is the case that those nations will have weaker environmental controls on most ordinary (“criteria”) pollutants. So one likely outcome is a global increase in pollution, yet another example of the adverse unintended consequences of federal feel-good legislation.

If there is a credit for GHG policies enforced by exporters to the U.S., then the expansion of the bureaucracy and politicization of trade policies will be even greater. Goods imported from a given nation are likely to embody components and other inputs from other nations — perhaps many other nations — in vastly differing proportions, and those nations’ policies on GHG emissions almost certainly will vary considerably. The border adjustment would have to estimate transfer prices — always a subjective and problematic calculation — and the effects of shifting exchange rates, changing input proportions, and a host of other complexities in order to arrive at a credit for a given good from a given economy.

Crudely, the Curbelo proposal implies an increase in energy costs of at least 5 percent, driven not by stronger growth but instead by an artificial supply reduction. Given the long-term relationship of energy use and U.S. GDP and employment growth, a rough estimate of the aggregate effects of this proposal are reduced GDP and employment growth of 1 percent or more, again in exchange for no environmental benefits at all.

The comedy highlight of Curbelo’s proposal is the creation of a National Climate Commission, which after 2025 would set goals for emissions reductions based upon the “latest scientific findings.” Science is a process of repeated hypothesis and gathering of evidence — there is no final scientific “truth” — so the “latest scientific findings” will not settle the scientific debate over climate change, much less the policy debate. Nor will they affect the incentives shaping decisions forthcoming from the Commission, which will prove to be yet another federal bureaucracy driven by an interest in more rather than fewer climate regulations. Political support from the winners is understandable. But why would anyone else vote for this?