Real Politic: Carbon Tax Pessimism (Part I)
“The day after enactment, environmentalists will start calling for raising the carbon tax, decoupling it from revenue neutrality to finance more wind and solar boondoggles. And they’ll still want additional regulations to drive emissions down faster. If conservatives resist this, they’ll get the same ‘denier’ routine they get now.”
I first started working on climate policy in 1997, first in California, then Canada, and then in Washington, D.C. Having spent seven years inside the Beltway, I’ve now returned to Canada, working for the Fraser Institute on natural resource policy.
In the states, I watched the U.S. edge nearer-and-nearer to very bad climate policy, that being a mixture of cap-and-trade and ad hoc regulation. The inside-the-beltway “consensus” was that we were inevitably headed for national greenhouse gas (GHG) control legislation.
Study after study warned that national mitigation policies would cause significant economic damage, be regionally discriminatory, be economically regressive, and reduce U.S. competitiveness internationally. The climate effects from such policies were much more modest, if discernible. This very bad combination inspired the ‘all pain, no gain’ moniker from free-market groups.
Caps vs. Taxes: The Old Debate
In that policy environment, I co-authored a study at the American Enterprise Institute (AEI) with Kevin Hassett and Steve Hayward in 2007. Climate Change: Caps vs. Taxes explored what an ideal carbon tax would look like, and why such a tax would be better than cap-and-trade—and better than regulation.
Our study found that a $15/ton carbon tax
would result in an 11 percent decline in CO2 emissions, while raising non-coal-based energy forms modestly. Coal-based energy prices would be affected more strongly, which is to be expected in any plan genuinely intended to reduce GHG emissions. A number of possible mechanisms are available to refund the revenues raised by this tax. On net, these tools could significantly reduce the economic costs of the tax and quite possibly provide economic benefits.
We never actually called for implementing such a tax; we just said if you structure it thus, a carbon tax would do less harm than cap-and-trade and regulations. Our exact words were, “For these reasons, we conclude that if aggressive actions are to be taken to control GHG emissions, carbon-centered tax reform–not GHG emission trading–is the superior policy option.”
Still, after that publication, carbon-tax proponents thought I was in their camp, and I started to be asked to speak about carbon taxes, serve on panels to discuss carbon taxes, and to write about the same in various magazines, newspapers, etc.
But a funny thing happened on the way to the Forum: I noticed none of the people actually advocating carbon taxes wanted anything like an economically-idealized carbon tax.
Not only that, they did not want carbon taxes instead of regulations, they wanted carbon taxes and trading systems and regulations.
I came to realize that my speaking about our idealized carbon tax was, in a sense, playing into the hands of people who wanted a very non-idealized tax regime. As I wrote in 2011:
… watching states loot “dedicated” eco-taxes for general revenue; seeing the emergence of more proposals for revenue-raising carbon taxes to finance continued deficit spending; and generally bearing witness to endless insincerity on the part of greens and their allies, I have to admit that my friends in the free-market movement were right: A carbon tax would simply become another general revenue raiser, and a step in carbon-seduction.
(The carbon seductress says: “Oh, come on, you’ve already accepted the tax, now let’s do cap-and-trade, and regulation.”)
So, in general, what is right and wrong about a carbon tax in today’s U.S. policy debate?