The Corner

Beware Liberals Bearing Miracle Cures: Blinder’s Case for a Carbon Tax

My graduate-school professor Alan Blinder took to the pages of the Wall Street Journal today to extol the job-creation virtues of a carbon tax: “The ‘bang for the buck’ from a phased-in carbon tax would be infinite at first: lots of jobs at zero cost to the federal budget.”

Wow, that sure sounds good. Unfortunately, it ignores some Economics 101.

Only in a government-centric view of the universe would something be “free” because it has no budgetary impact. It is costly — very costly — to change from one energy portfolio (and the infrastructure that supports it) to another. Period. Nobody should pretend otherwise. A principled argument would acknowledge this cost and provide convincing evidence of compensating benefits , and certainly any argument should propose keeping the costs as low as possible. So it is curious by omission that Professor Blinder does not mention the need for complete pre-emption of provisions of the Clean Air Act (and Clean Water Act, and Endangered Species Act…) that lead to draconian command-and-control outcomes. Why argue for markets and then chain them to regulatory anchors?

Worse, Professor Blinder’s argument is a classic Politics 101 bait-and-switch. He pays lip service to the need to cut spending in the future (“lower spending as shares of GDP”) but argues for passing a tax increase right now. This would inevitably reduce pressure for needed spending discipline over the near term, lead to a permanently higher level of spending and taxes, and harm U.S. growth and competitiveness.

Professor Blinder could have solved this probably by arguing that any carbon-tax revenues should be deposited into a trust fund that could be used for a single purpose: cutting payroll and corporation taxes. That way, the carbon tax would not cause government to grow, and would in a single stroke address the competitiveness and fairness issues usually associated with a carbon tax. Low-income workers would get a tax cut to offset higher traditional-energy costs, and U.S. corporations would get agreed-upon relief from the onerous U.S. corporation income tax.

In fairness, three of Professor Blinder’s points are spot on. First, the notion that raising taxes right now is a good idea was firmly put to rest by the actions of the president and the lame-duck Congress in December. Those legislative actions codified “policy as usual” in Washington. The good news is that taxes remained low; the bad news is that there has been no tangible progress on cutting spending to change the current policy of enormous deficits.

Next, there can be little doubt that bringing certainty to the policy outlook would benefit businesses. Utilities, in particular, have to make five-decade investment decisions. The more that can be done to reduce their uncertainty, the better. The same argument applies to every business structure investment, equipment choice, or long-term fuel contract. Other things being the same, knowing what is coming out of Washington is better than not.

Finally, it is indisputable that market-based policies are preferable. This lesson goes back at least as far as 1989–90, when the first Bush White House had to dragoon John Dingell and a Democratic Congress into using a permit-trading system to address acid rain. The result? Acid rain is no longer a daily topic of conversation in the Northeast, and the program came in way below its project economic cost.

In the bad old days, Democrats bad-mouthed trading systems and price mechanisms; Republicans opposed rifle-shot subsidies and mandates. Weirdly, conservatives have a need to relearn these lessons. Republicans need to swear off targeted subsidies (ethanol credits, wind and solar production tax credits, loan guarantees) and regulations (“renewable energy standards” and the like) and get back on the market train.

If you want to do something about carbon pollution, a carbon tax and a cap-and-trade system are the same policy. Set a carbon tax at $10 a ton and you will get a certain level of emissions. Set a cap at that level of emissions and permits will trade for $10 a ton.

Now, you may not want to engage in a carbon policy. Fair enough. But if one decides to move in that direction for political, business-certainty, or pollution reasons, there is no excuse for returning to the bad old days of subsidies and command-and-control regulation. Conservatives bashing their intellectual offspring is simply mystifying.

So, let’s summarize a complete argument: Nothing is free, don’t raise taxes now or grow the government, and use market forces.

Douglas Holtz-Eakin is president of the American Action Forum.

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