Carbon Taxes: Kick ‘Em While They’re Down

by Marlo Lewis on November 28, 2012

in Features

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House Speaker John Boehner, Majority Leader Eric Cantor, and Majority Whip Kevin McCarthy have signed a No Climate Tax Pledge. Bad news for those pushing carbon taxes as part of a budget deal. 

Friends of affordable energy can ill-afford complacency, however. The Dumb Party has been known to snatch defeat from the jaws of victory, and carbon tax advocates are nothing if not tenacious. So when it comes to carbon taxes, I say kick ‘em while they’re down.

To that end, I excerpt below some insightful comments by several contributors to last week’s National Journal Energy Blog discussion, “Is Washington Ready for a Carbon Tax?

David Kreutzer (Heritage Foundation) notes the chutzpah of those who, having failed to sell the public on the stealth energy tax called cap-and-trade, now expect the public to buy an open, avowed, unvarnished energy tax:

Once the electorate was made to realize that cap and trade bills (Lieberman-Warner, Waxman-Markey, etc.) were actually taxes on fossil energy, cap and trade became political poison. So it is surprising that an explicit tax on fossil energy is now being pushed in Washington.

Kreutzer then debunks the argument that conservatives should support a “revenue neutral” carbon tax that displaces EPA regulation of greenhouse gases:

The hope among carbon-tax proponents is that they can sugar coat the tax and make it palatable to conservatives, or at least to enough conservatives. This proposed confection has two ingredients. First, the carbon tax is to be a revenue-neutral swap for some even more harmful tax. Second, a carbon tax would obviate the need for regulation of carbon dioxide and for subsidies to low-carbon energy.

“Revenue neutral” is supposed to mean that each dollar raised will cut another tax by a dollar. But with neutrality there is no gravy to spread around to all the special interests—and we are talking about $100s of billions in gravy every year. So revenue neutrality will never happen. . . .

[As for a tax-for-regulation swap:] That logic may work in PowerPoint-filled rooms at think tanks, but not in the proverbial smoke-filled rooms in Congress. If this logic did carry over, then cap and trade also would have eliminated the need for carbon regulation. Instead of reducing regulations, the cap and trade bills added them. For instance, the Waxman-Markey bill went on for nearly 700 pages before it even got to cap and trade.

Just in case there might be some confusion as to whether the left is willing to trade off regulation for a carbon tax, Representative Waxman recently cleared things up: “A carbon tax or a price on carbon would be a strong incentive for the development of new technologies. But because it’s so complicated, I would not support preempting EPA. EPA can assure us that we can actually get the reductions we need.”

Susan Dudley (George Washington University Regulatory Studies Center) explains why key interest groups, regulatory agencies, and politicians would not support a carbon tax that preempts greenhouse gas regulation and cap-and-trade:

Agribusiness interests have been making billions from misguided mandates for renewable fuels, and would fight any attempt to replace them with a carbon tax. Wind and solar technologies, if they really work, would benefit from a carbon tax. But to the extent they can’t compete, they will likely have a strong preference for the direct subsidies they enjoy now.

The regulators who have been using climate concerns to seek greater authority to control the economy will see little to like in a simple carbon tax. And the market-mimicking virtues of a carbon tax will not be realized unless Congress is willing to reverse the Supreme Court’s decision to apply the Clean Air Act to GHGs, to repeal DOT’s automobile fuel economy standards and DOE’s appliance efficiency standards, and to clean out the morass of other regulations that purport to control our energy use. Opposition to a tax may be especially strong from state regulators, such as those in California, who have begun to sell GHG allowances and will oppose any policy that would convert those revenues into federal revenues.

The costs of any program aimed at reducing GHG emissions will cause prices of goods and services to rise, but for politicians, the advantage of the current regulation-subsidy patchwork or a cap-and-trade system is that these higher prices are not easily traced to climate policies, or to the politicians responsible for them. A transparent carbon tax, in addition to reducing emissions more cost-effectively than the alternatives, would allow Americans openly to weigh the tradeoffs between higher costs and environmental benefits.

The final nail in the carbon-tax coffin is that with it would come demands for exemptions, rebates, credits, and all manner of loopholes, in addition to a wish list of new spending. If the revenues are used as they should be – to offset other taxes and reduce the deficit – then legislators and the administration will not get to spend them on vocal constituencies and pet projects. What’s the fun in that? Politicians who habitually ask themselves “whose votes am I buying if I support this bill?” will not find a persuasive answer in a clean and simple carbon tax.

Jim Kerr (McGuirreWoods LLP) delves into the devilish details that would have to be worked out before the usual suspects could agree on carbon tax legislation:

While economists may see a carbon tax as simple to enact, that will certainly not be the case. A carbon tax raises precisely the same difficult and complicated issues as a cap-and-trade system. Because both approaches put a price on carbon, both will have substantial real world impacts that have to be addressed. What price level would a carbon tax start at? How much would it increase and how fast? Would some revenues be used to further carbon reduction and energy efficiency efforts, how much and how? How will electric power consumers be protected from rate shocks? How will low income consumers be protected from disproportionate impacts to their disposable incomes? How will carbon-intensive industries be protected from competition and job losses? How will offsets (identified as a key cost containment issue) be recognized?

The biggest political issues to be resolved will involve geographic inequities, where regions that are more heavily dependent on higher carbon fuels will have to pay more to decarbonize their economies, and also pay higher taxes until those efforts bear fruit. Those regions may also object to a uniform redistribution of carbon tax revenues (e.g., for deficit reduction) where they have paid in far more in carbon taxes than other regions.

In the Waxman-Markey debates, many of these issues were addressed by complicated agreements on allowance allocations, and other aspects of the program. In a carbon tax system, they could similarly be addressed though tax credits or rebates, as appropriate, but only after difficult debates, none of which have begun. Thus, although the types of issues in play, and the alternatives available, are similar as between a carbon tax and a carbon cap, that does not make the decisions on these issues any easier.

Paul Cicio (Industrial Energy Consumers of America) warns of the special peril carbon taxes pose to U.S. manufacturers:

Since 2000, we have lost some 5,000,000 jobs and shutdown about 54,000 manufacturing facilities. For perspective, in 2010 and 2011 we increased about 500,000 jobs – so you can appreciate how far we need to go to re-build the manufacturing sector. Because of our failure to compete, the trade deficit in 2011 finished at $445 billion. Policy makers need to understand that a carbon tax is inconsistent with the potential for a manufacturing renaissance.

Only now, because of low natural gas costs are we beginning to see billions in capital investment announcements that could usher in a tremendous period of economic growth, jobs and exports. A carbon tax would directly increase energy costs, reduce competitiveness and raise great uncertainties toward this new investment.

A $15 per ton carbon tax would increase manufacturing costs by about $17 billion per year and a $50 per ton carbon tax by about $56 billion per year. These are significant increases in costs.

Charles Drevna (American Fuel & Petrochemical Manufacturers) argues that carbon taxes would still be regressive even if combined with feebates and cuts in other taxes:

A reduction in income tax rates won’t help 70 percent of households in the lowest income distribution or 36 percent in the second-lowest quintile. Income tax or payroll tax rebates are equally problematic since it would be of no value to those who don’t pay those specific taxes. Similarly, a payroll tax rebate would fail to reach 46 percent of households in the lowest income bracket. The CBO cautioned, “Not everyone – especially members of low-income households and retirees – pay payroll taxes or files an income tax return. But people would need to file a return to participate in a rebate program based on the income tax system.”

Households could of course file an income tax return just to receive the rebate, but we know from experience that millions won’t. For example, in 2008 as part of the Economic Stimulus Act, the Joint Committee on Taxation estimated a payout of $106.7 billion in stimulus funds, but only $94.1 billion was distributed. A lot of money was left on the table and the same will hold true should Congress pass a carbon tax. Defenders of a carbon tax expect the very same body that managed the country right into a record deficit to now manage what could be the largest federal rebate program ever enacted.

Bill O’Keefe (John Marshall Institute) views the carbon tax campaign as a triumph of hope over experience:

[Al Gore's proposal in 1993 for a BTU tax on energy] became a catalyst for a broad based coalition representing large and small businesses, transportation, manufacturing, agriculture, building trades, and even social service organizations that need gasoline and heating oil to care for the poor and homeless. The work of the coalition captured a lot of attention from the media. Its grassroots activities made clear to members of Congress that they should support the tax at their own peril. Since, as Samuel Johnson once observed, there is nothing like a hanging to concentrate the mind, Democrat support for the tax vanished. With outright defeat clear, the Administration sued for peace and the BTU became a relic of flawed policy.

BTU became a verb and members of Congress wanted to avoid being BTU-ed, but in 1994 voters enacted retribution and turned Congress over to republicans.

The economy is in worse shape today than it was in 1993, and it could easily slip back into recession. . . .A small carbon tax at the outset would be easy to increase in small increments. Then in time a small tax will become a big tax. Anyone who doubts this should study the VAT experience in Europe. Rates go up; never down. Even today as they face economic catastrophe, Spain and Greece are considering raising their VAT above 20 percent. . . .We can do better than create the son of a BTU!


Rick Piltz November 28, 2012 at 5:37 pm

Re Bill O’Keefe’s position: The Marshall Institute is not named for John Marshall, the 19th century Supreme Court Chief Justice, but rather for George C. Marshall, the World War II military leader and great statesman for whom the Marhsall Plan is named — and who is probably rolling over in his grave at the right-wing values propagated by the Marshall Institute.

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