Energy & Environment

The Confusions of the ‘Conservative’ Carbon Tax

Chevron gas station in Buckeye, Ariz. (Joshua Lott/Reuters)
The policy is a political nonstarter, and it wouldn’t do much anyway.

Various news reports and self-serving political pronouncements would have us believe that imposition of a tax on “carbon” — emissions of greenhouse gases (GHG) — now enjoys growing support among Republican policymakers and conservative observers, a political premise advertised at a decibel level vastly higher than actual political reality would support. That reality is straightforward: Any policy to reduce GHG emissions by definition must increase energy costs, and policymakers endorsing such policies would have to describe the benefits that supposedly would redound to the electorate.

And that is a very serious political stumbling block: The most prominent “conservative” proposals for a carbon tax would reduce global temperatures in the year 2100 by about 0.015°C, as estimated by the EPA climate model under a set of assumptions exaggerating the temperature effect of GHG reductions. That effect would not be measurable, as it is an order of magnitude smaller than the standard deviation of the surface-temperature record. A complete elimination of U.S. GHG emissions, envisioned by supporters of the Green New Deal, would yield a temperature reduction of 0.173°C under the same favorable assumptions. (An international policy vastly more aggressive than the Paris agreement, and thus utterly unachievable, would have an effect of about 0.5°C.)

And so the “insurance” argument for a carbon tax — it would ameliorate a future climate crisis — is a nonstarter, as the “insurance” created with any carbon tax even remotely plausible would be effectively nonexistent. (The recent IPCC “1.5 degrees Celsius” report calls for an energy tax equivalent to $29 per gallon of gasoline.)

This all-cost, no-benefit feature of a carbon tax, unsurprisingly, has proven no obstacle for its promoters. Instead, they make a number of arguments in favor of a carbon tax:

  • A carbon tax could be made “revenue neutral” by combining it with reductions in other taxes, or the revenues could be returned to all Americans in the form of dividends.
  • A border-adjustment exemption for exports of U.S. goods and a tariff on imports of foreign goods would be a simple system to preserve U.S. competitiveness.
  • A tax would be more “efficient” than regulations as a tool to reduce GHG emissions.
  • Conservatives cannot beat something with nothing.

Both the revenue neutrality and “dividend” arguments are wildly unrealistic. The central impact of a carbon tax would be an increase in the prices of conventional energy, and the attendant adverse effects on consumers and producers, to be inflicted disproportionately in given sectors and geographic regions, would generate powerful demands for compensation through the processes of congressional bargaining, particularly in the U.S. Senate. Some substantial portion of the carbon-tax revenues directly or indirectly would be used to compensate various interest groups able to form a majority coalition in Congress, which inexorably would change over time. Given, for example, that “coal country” gave heavy political support to President Trump precisely because of the Obama administration’s political assault on its economic interests, it is difficult to believe that those voters will be satisfied with only an equal per-capita share of the revenues, as the carbon tax would affect them disproportionately. Investment flows and wages would be affected more in some sectors and geographic regions relative to others; would the complex bargaining process shaping legislation simply ignore them? More generally: Can anyone possibly believe that a massive new revenue source would not engender a feeding frenzy in Congress?

 

With respect to the preservation of the competitiveness of U.S. sectors: The usual proposal from proponents of a carbon tax is a border-tax adjustment, with fees imposed on imports from nations without comparable GHG pricing systems and rebates to exporters for sales into nations without such policies. No proponent of such a policy has explained how the tax adjustment would be implemented in the case of nations without GHG pricing systems, but with regulations, or subsidies for such alternative energy sources as wind and solar power, or other policies that are purported to reduce GHG emissions. Such adjustments for non-tax policies would be enormously complex, requiring an estimate of the tax-equivalent value of the given policies under examination. Do the proponents believe that the bureaucracies producing these estimates will not be pressured to adjust them in various directions depending on which interests are being affected?

The larger problem is that of the international supply-chain phenomenon: 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 border-adjustment fee or rebate for a given economy. And even that is an abstraction that shunts aside various political pressures that inexorably will be felt and incorporated.

This means that a new bureaucracy will have a vast amount of work to do, with important implications for the allocation of resources. So much for the claim that the border adjustment would be simple or that it would streamline “the regulatory state” and shrink “the overall size of government,” claims that the proponents of a carbon tax actually seem to believe, to the extent that they have thought about this dimension of the issue at all.

Then there is the argument that the tax, by allowing individuals and firms to reduce GHG emissions in whatever ways they find least costly, is a “market” policy that would yield an efficiency improvement over a command-and-control regulatory approach that mandates across-the-board GHG reductions and specific technological fixes.

The “market” description of a carbon tax is illusory. The government must choose the tax and thus implicitly the allowable level of GHG emissions. The level of the tax and the implicit future emissions of GHG are wholly arbitrary in most discussions, driven by some sense of what is politically feasible, by the goals for reductions in other taxes, and by estimates of the revenues needed to fund revenue neutrality. There is nothing “market”-driven in any of this.

Many economists argue that a tax on GHG emissions would reduce the overall cost of achieving given emissions cuts below the cost that would obtain under command-and-control regulations, because emitters would be able to choose the least costly means of achieving emissions reductions in the face of the tax. The problem with that argument is straightforward: The emissions goal is not fixed or exogenous. Instead, it must be chosen. “Efficiency” requires both an efficient emissions goal that equates the marginal benefits and costs of emissions reductions, and tools to achieve that amount of reductions that minimize the cost of doing so.

Once government derives revenues from a system of carbon taxes, with ensuing political competition for those revenues, it is not difficult to predict that under a broad range of conditions the chosen emissions-reduction goal will be more stringent than that emerging from a regulatory process — in particular if policymakers are looking forward to the next election. The implicit use of an excessively high discount rate would yield a preference for higher revenues in the short run at the expense of lower revenues over the long run.

Because the marginal members of the congressional majority are likely to be the incumbents in greatest danger of defeat in the next election, it is not difficult to predict that the political equilibrium for a carbon tax will be a rate maximizing revenues over a time period shorter rather than longer. For those marginal members of the majority, the political benefits of greater spending are more or less immediate, particularly given that the burdens of the carbon tax would be hidden in the prices of myriad goods and services.

Perhaps regulators would also have incentives to choose emissions goals that are too stringent, if doing so is consistent with the larger goal of maximizing their budgets (or discretionary budgets), and because overly stringent regulations may serve an ideological agenda. But in the case in which Congress must approve or has the power to repeal given regulations, there are strong reasons to believe that a tax approach would prove less efficient overall than the regulatory approach.

Finally, there is the argument that conservatives must offer an alternative to left-wing GHG policies: “You can’t beat something with nothing.” As a matter of principle, any attempt to provide a “conservative” GHG policy means automatically an endorsement of the assumption that only ever-more government can address what the environmentalist Left deems a climate crisis, for which there is no evidence. And if the crisis is existential, then no cost is too high.

Once conservatives have endorsed a carbon tax, they will have no principled answer to the endless pressures for more government intervention. Conservatives cannot defeat climate alarmism and the fundamental threat to freedom that it represents unless we defend first principles. In the context of climate policy, watchful waiting and adaptation over time are the only sensible approaches consistent with them.

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