IER president on carbon taxes

A Taxing Debate, by Thomas J. Pyle
Planet Gore, Monday, March 16, 2009

Economists rarely agree on the past, and never on the future. But in the present debate over carbon taxes, a strange consensus is starting to form around the idea that a national tax on carbon is better than installing an economy-wide cap on it.

Maybe so. But being "better" than cap-and-trade doesn't make a carbon tax a worthwhile public investment. Black bears are less dangerous than grizzly bears; neither should be let loose in the subway. Just as we shouldn't let the perfect be the enemy of the good, we shouldn't let the horrendous serve as a justification for the horrible.

Well-intentioned proponents of the carbon tax call it "equitable and fair." It's "straightforward and upfront" — even its detractors admit that. And the coup de grâce: "It's budget neutral."
Here's how it's supposed to work: The federal government conjures a carbon-tax rate it believes will incent the American public to use, generate, and emit less of the stuff. To offset that new levy, the government reduces by a corresponding amount its tax-related take on things we desperately need right now: jobs, investment, and income. A revenue-neutral carbon tax, its advocates say, will create new jobs, generate new wealth, and save the planet, to boot.

The problem is, being revenue neutral from the government's point-of-view doesn't make a carbon tax revenue neutral for American families. Even if the government reduces income taxes to offset the imposition of a carbon tax, that tax will immediately increase the cost of nearly everything that's produced, consumed, manufactured, or transported — including and especially food and fuel.

And what of the nearly 40 percent of the public that doesn't pay taxes on its income? How are they made whole under a carbon tax system that's "offset" by tax reductions elsewhere? If government were to reduce payroll taxes rather than income taxes to achieve budget neutrality, how would we cover the ballooning obligations of our entitlement programs for retirees? A plan that would rob Peter to pay Paul is bad enough; robbing Mildred to subsidize Moonbat represents the height of irresponsibility.

Still, a growing number of economists — left, right, and middle — agree that a straight carbon tax makes more sense than cap and trade. Their fundamental contention is that it's more transparent, more understandable, and subject to less political manipulation than a purposefully opaque, intentionally unwieldy cap-and-trade regime. All good points. And irrelevant ones.
Why? Because the carbon tax is being sold as a means to reduce the concentration of atmospheric carbon dioxide, and thus to slow the pace and intensity of our world's changing climate. But America's share of the world's total CO2 emissions is getting smaller and smaller by the year, as developing nations' share continues to grow. The trend lines are so pronounced that if the U.S. were to halt its use of hydrocarbons today, the increase in carbon emissions from the rest of the world would replace our emissions in fewer than eight years. If we adopted a more modest approach - ban all cars, for instance - the rest of the world would replace our transportation emissions in less than two years.

And since Congress is powerless to levy a carbon tax on other countries, a unilateral, preemptive strike on carbon would only erode our ability to compete economically, without doing anything meaningful thing to change the composition of our air or the quality of our environment.
China and India will be happy to meet us half-way on at least one crucial consideration: they're more than willing to take the jobs America hemorrhages if we go it alone on carbon taxation. Government accountants can call the plan "budget neutral," but the labor department's monthly unemployment reports will have the final say on whether it is "job neutral."

Are the American people willing — or able — to set aside trillions of dollars to support a plan that cannot work without global participation? The very least we should expect from our elected leaders is a grown-up discussion about what it will all cost, what we'll get in return, and whether or not we can afford it right now. Or ever.

Those who support cap-and-trade have refused to engage in that discussion from the start. Carbon-tax supporters have been more up front. But that doesn't mean they're right.

— Thomas J. Pyle is president of the Institute for Energy Research