Clinton Silent. Trump in Denial. Scalise Attempts Burial.

But Carbon Taxes Aren’t Dead — Seven Key Reasons

Hillary Clinton has avoided even mentioning carbon taxes.[1] Donald Trump (currently) asserts that global warming is a “chinese hoax.”[2] And all but one House Republican recently voted to condemn carbon taxes.[3] Nevertheless, there are signs that the public and many members of Congress are (excruciatingly slowly) absorbing the economic message that carbon taxes offer superior climate benefits at lower cost than other policies, and the political message that the revenue from a carbon tax will be large and how those funds are spent (or re-distributed) will be vitally important. But unlike regulations and mandates (which generate no revenue) and subsidies (which cost taxpayers dearly), carbon taxes generate substantial revenue, offering them special salience in the context of fiscal policy and tax reform. An oft-repeated Capitol Hill truism is that tax reform “seems impossible until fifteen minutes before it happens.” As pressure mounts to address climate risk, to reform the tax code in order to improve our economy and to close revenue short-falls, carbon taxes are sure to come up again.

Below I sketch seven key reasons why, despite extreme political shenanigans, carbon taxes are “not dead yet.”[4]

  1. Superior Effectiveness:

Carbon taxes are the most potent, straightforward climate policy.[5]  Economists, even conservative economists[6] and some libertarians[7] consistently conclude from both theoretical analysis and from accumulating empirical evidence[8] that carbon taxes reduce climate pollution more broadly and at far lower cost than regulations, mandates and subsidies.[9] And that should matter to anyone concerned about either climate or economy (or both) because the transition to sustainable energy won’t be easy or cheap.[10] Second or third-best policies (and waiting too long to start) are making the transition a lot more costly and dangerous.[11] And despite Donald Trump’s promise to “tear up” the Paris climate accord, the U.S. will need to implement efficient policies to reduce emissions[12] and would benefit by leadership in low-carbon technology.[13]

  1. Prices DO Change Behavior:

Contrary to recent assertions by Mary Nichols of the California Air Resources Board that carbon taxes might not be effective at reducing emissions[14] (echoing similar nonsense by then-Senator John Kerry, seven years ago[15]) we know very well that the demand for energy does decline with price. (In economic parlance: Demand curves slope downward — a principle about as fundamental to economics as gravity is to Newtonian physics.)

Carbon taxes work by explicitly building hidden costs of climate pollution into fossil fuel prices.  Tax rates are set in proportion to the carbon comprising each fuel.[16] Per unit of energy released, coal releases about 30% more CO2 than gasoline, while natural gas releases about 20% less.[17] Carbon taxes transmit that “price signal” to every energy decision-maker, ranging from gasoline buyers to global investors, encouraging all of us to innovate, choose more climate-friendly options, and to plan ahead with climate costs in mind in the most cost-effective ways we can think of. Over time, consumer and industrial decisions are sensitive to price expectations, measured by economists as “price elasticity.”[18] The recent shale gas boom provides a striking example: cheaper natural gas is rapidly displacing coal as the primary fuel to generate electricity.[19] Similarly, a carbon tax will encourage replacement of fossil fuels with low-carbon energy such as wind, solar, hydro, geo-thermal and, for better or worse, nuclear power. Plus, of course, energy efficiency will pay off more handsomely than ever.[20]

  1. We Need The Revenue:

An effective carbon tax would raise substantial revenue. Starting modestly at $42/ton CO2, a U.S. carbon tax would raise about $220 billion per year, about 1/10 of the revenue raised by federal income taxes.[21] Because national level carbon prices will need to keep rising for decades if we are serious about reducing the risk of catastrophic climate outcomes,[22] carbon tax revenue will also keep growing for decades. At some point, one hopes that policymakers will see that large and growing revenue stream as an opportunity.[23] (Of course, as carbon emissions decline, carbon tax revenue will eventually decline even more rapidly than the carbon tax increases.  When that problem actually arises, it will be cause for celebration by our children and grandchildren.)

  1. Tax Reform Can Boost Economic Growth, Carbon Taxes Can Help:

Some analysts and policymakers suggest pairing a carbon tax with tax cuts in other areas, making the net effect “revenue-neutral.”[24] Taxes on wages tend to discourage work[25] and some evidence suggests that the U.S.’s higher-than-average marginal corporate income tax rates discourage investment and deter job growth.[26] Thus, cutting wage and corporate income taxes with the funds from an increasing a tax on carbon pollution offers a potential win-win, spurring economic growth while reducing climate pollution.[27]

  1. Other “Carbon Pricing” And Regulatory Systems Are Clumsy, and They’re Failing:

Theoretically, emissions trading systems (a.k.a., “cap-and-trade”) can “put a price on carbon” to reduce climate pollution in much the same way a carbon tax would.[28] But emissions trading has proven much more complex and less effective than hoped. The European Union’s emissions trading system,[29] California’s AB-32[30] and the Northeastern States’ Regional Greenhouse Gas Initiative[31] are all plagued by anemic and volatile carbon prices. Emissions trading systems have not generated the price expectations needed to guide consumers and investors over the long term. Similarly, regulatory approaches such as EPA’s Clean Power Plan have limited scope, scalability and cannot be expected to continue driving innovation and efficiency in the way a persistent economy-wide price signal will. In contrast, carbon taxes in British Columbia (Canada),[32] as well as Norway and Sweden have proven more effective and durable. The International Monetary Fund is encouraging nations of all sizes and stages of economic development to try carbon taxes both for their climate benefits and as choice fiscal policy.[33]

  1. “We Shall Overcome” (Science Denial and Economics Denial):

Political resistance looks like a huge obstacle to carbon taxes in the U.S. Last month, all but one Republican representative voted for a (non-binding) resolution by Rep. Steve Scalise (R-LA) condemning carbon taxes.[34] Some do not agree that carbon emissions need to be reduced in the first place. Others eschew new taxes, despite the potential to use carbon tax revenue to reduce growth-dampening taxes on work and investment. The vote is a setback for climate policy, but House Republicans’ bluster suggests that maybe they sense momentum.

  1. Regulations Can Work as a “Backstop” To Carbon Taxes:

Some Democrats and environmental groups support carbon taxes, but many do not fully embrace the principle of price elasticity (or even the “rational actor” assumption); they feel more certain about the effectiveness of regulations, subsidies and mandates which have been their primary tools for five decades. After years of arduous struggle to enact regulations, subsidies and mandates, Democrats and environmental groups are reluctant to even discuss replacing them with a more powerful tool, a carbon tax. They fear losing the ground they have gained. But existing programs could be used as a “backstop” that would engage only if carbon taxes do not effectuate sufficient emissions reductions. And that’s a very good bet: rising carbon taxes will continue to be effective at reducing emissions if the price level marches predictably upward.[35] Thus, those who dislike regulatory bureaucracy[36] should prefer carbon taxes which leave energy decisions to those who can best make them. And those who have labored to enact greenhouse gas regulations should be willing to add a new more powerful tool, if they can be assured by a regulatory backstop.

In short: there’s still potential for a “grand bargain” over tax and regulatory reform (perhaps early next year); we should make sure carbon taxes are included.

[1] Coral Davenport, “Hillary Clinton’s Ambitious Climate Change Plan Avoids Carbon Tax,” (New York Times — July 2, 2016); “Clinton climate push will get Sanders voters, define Trump,” (The Hill — June 20, 2016); Anne C. Mulkern, “Hillary Clinton’s Plan to Combat Climate Change,” (ClimateWire – May 9, 2016, reproduced in Scientific American) .

[2] Louis Jacobson, “Yes, Donald Trump did call climate change a Chinese hoax,” (PolitiFact — June 3, 2016).

[3]The Grand Oil Party: House Republicans denounce a carbon tax,” (The Guardian — June 13, 2016).  Rep. David Jolly (R-FL) abstained from the vote.

[4] Pace, “Monty Python and the Holy Grail” (1975).

[5] Joseph E. Aldy, “The Case for a U.S. Carbon Tax,” (Oxford Energy Forum, 2013).

[6] Greg Mankiw, “The Key Role of Conservatives in Taxing Carbon” (New York Times – September 4, 2015).

[7] Jerry Taylor, “The Conservative Case for a Carbon Tax,” (Niskanen Center, 2015).

[8] Brian C. Murray and Nicholas Rivers, “British Columbia’s Revenue-Neutral Carbon Tax: A Review,” (Nicholas Institute, 2015).

[9] Roberton C. Williams, “Environmental Taxation,” (Resources for the Future, 2016).

[10] David Timmons, Jonathan M. Harris and Brian Roach, “The Economics of Renewable Energy,” (Tufts University, 2014).

[11] Warwick J. McKibbin, Adele Morris and Peter J. Wilcoxen, “The Economic Consequences of Delay in U.S. Climate Policy,” (Brookings, 2014).

[12]What it will take to deliver on the Paris climate agreement” (Brookings, 2016).

[13]The Benefits of a Low-Carbon Future,” (WorldWatch Institute, 2013).

[14] Ben Adler,”Sanders and Clinton teams fight over climate language in Democratic platform” (Grist, June 2016).

[15] James Handley, “Memo to Sen. Kerry: Climate Science Includes Economics” (Carbon Tax Center, 2009).

[16] Gilbert E. Metcalf and David Weisbach, “The Design of a Carbon Tax,” (Harvard Environmental Law Review, 2009).

[17] U.S. Energy Information Agency, “How much carbon dioxide is produced when different fuels are burned?” (FAQ’s 2016).

[18] Congressional Budget Office, “Gasoline Prices and Vehicle Markets” (2007); Houston Chronicle, “Falling gas prices are driving consumers back to bigger vehicles” (June 2016).

[19] Energy Information Agency, “Natural gas expected to surpass coal in mix of fuel used for U.S. power generation in 2016” (March 2016).

[20] International Energy Agency, “Energy Efficiency Policy and Carbon Pricing,” (2011).

[21] Greg Dotson and Ben Bovarnick, “Carbon Pricing in a Fiscal Context,” (Center for American Progress, 2016).

[22] Alan Fawcett, Leon C. Clarke and John P. Weyant, “Carbon Taxes to Achieve Emissions Targets” (2014), included in compilation book by Ian Parry, Adele Morris & Roberton C. Williams, “Implementing a U.S. Carbon Tax” (2015).

[23] One such opportunity is the potential for a carbon tax to partially fund a “Universal Basic Income.” See, Judith Shulevitz “It’s Payback Time for Women” (New York Times – January 8, 2016).  In some ways, UBI would be a grander version of the proposal by Citizens’ Climate Lobby for a “carbon fee and dividend.” In his State of the Union address, President Obama raised another potentially popular revenue opportunity when he proposed an “oil fee” to fund sustainable infrastructure.

[24] Donald Marron and Adele Morris, “How To Use Carbon Tax Revenues,” (Brookings, 2016).

[25] Douglas Elmendorf (Testimony), “Policies for Increasing Economic Growth and Employment in the Short Term,” Congressional Budget Office (2010).

[26] Alexander Ljungqvist and Michael Smolyansky, “To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income,” (National Bureau of Economic Research, 2014).

[27] Lawrence H. Goulder, “Environmental Taxation and the Double Dividend: A Reader’s Guide,” (International Tax Public Finance, 1995).

[28] Kevin Kennedy, Michael Obeiter and Noah Kaufman, Getting Serious About Carbon Pricing, (World Resources Institute, 2016).

[29] Dallas Burtraw, Åsa Löfgren and Lars Zetterberg, “A Price Floor Solution to the Allowance Surplus in the EU Emissions Trading System” (Resources for the Future, 2015).

[30] Rory Carroll, “California’s landmark cap and trade program faces uncertain future,” (Reuters – June 15, 2016).

[31] Jonathan L. Ramseur, “The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Congress” (Congressional Research Service, 2015).

[32] Brian C. Murray and Nicholas Rivers, “British Columbia’s Revenue-Neutral Carbon Tax: A Review…” (Nicholas Institute, 2015).

[33]Fiscal Policy to Address Energy’s Environmental Impacts” (International Monetary Fund, 2014).

[34]House votes to condemn carbon tax,” (The Hill — June 10, 2016).

[35] James Handley, “Don’t Anchor a Carbon Tax to the Social Cost of Carbon” (Carbon Tax Center, 2015).  British Columbia’s carbon tax success story is tainted by its “frozen” price level that prevents the tax from continuing to reduce emissions as it did when the tax was rising by $5 every year.  See “B.C. businesses call on Clark to lift carbon tax freeze,” (Globe and Mail — March 31, 2016).

[36] Kelsey Snell, “Ryan releases plan to roll back Obama regulations,” (Washington Post — June 14, 2016).

 

Author: James Handley

James Handley coordinates the Carbon Tax Network. From its inception in 2007 until 2016, James served as policy analyst and Washington representative of the Carbon Tax Center. In that capacity, he attended Congressional hearings, studied and digested climate economics and climate policy literature; providing timely reports, summaries and blog posts for CTC's website while building a network of activists, academics and policymakers to support and advance transparent taxes on carbon pollution. Prior to CTC, James represented environmental and citizen organizations, including Beyond Pesticides and the National Organic Consumers Association in public interest litigation. Prior to private law practice, he served 14 years at EPA, enforcing environmental law, where he also served as an officer in EPA's union, representing science and legal professionals, especially whistleblowers. Before law school, James specialized in environmental and energy-efficient design at Brown & Root, Inc. and Scott Paper Co. James holds degrees in Chemical Engineering (Economics minor), Law (JD), and Environmental Law (LLM, highest honors).

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