Will Paris Encourage a Carbon Tax?

Will Paris Encourage a Carbon Tax?

The convening of the International Climate Conference in Paris next week is bound to focus attention on the long-standing question. Is the best way to deal with global warming to put a tax on carbon?

The carbon tax has been debated for over a decade and even tried once – unsuccessfully – in Australia. Economists see it without a doubt as the best say to use market mechanisms to limit carbon emissions. Liberals have long argued for it but even the major oil companies have promoted it as a way of bringing predictability to their market.

Opposed are conservatives who have two arguments for opposing it:

1) Global warming is a false concern.

2) The carbon tax will prove to be an unnecessary burden on the economy that will kill jobs and slow economic growth.

To their right are the die-hards who say that liberals can’t be trusted to:

1) Return the tax revenues through the reduction of other taxes.

2) Allow the carbon tax to substitute for other regulatory measures such as the Clean Power Plan and subsidies and mandates to encourage renewable energy.

One of the principal advocates of the carbon tax has been Irwin Stelzer, an economist and contributing editor to The Weekly Standard. In several lengthy pieces, Stelzer has argued that even if global warming were not a concern, a tax on carbon would be worth adopting because it serves as a tax on consumption rather than labor or capital. “A carbon tax would provide funds to make an attack on these nonsensical features of our tax code far easier,” he wrote.

At minimum such a tax can be revenue-neutral, with the proceeds offsetting reductions in other taxes; at maximum, it might be what Wall Street calls revenue-accretive, generating new revenues by stimulating growth and job creation.

Stelzer suggests that at least half the revenues from a carbon tax be used to lower the payroll tax – which hits low-income people harder – and to lower the business tax from the present 35 percent to a 26 percent figure much more in line with the rest of the world. He relies on a study by Resources for the Future, which concluded that “Carbon pricing may have a neutral or possibly even progressive effect – even before redistributing income.” In many respects, the carbon tax isn’t all that different from the universal sales tax proposed Presidential candidate Mike Huckabee or the business value-added tax proposed by candidate Ted Cruz.

But so far conservatives aren’t biting. They argue that once Congress got its hands on the extra revenue they would squander it on social spending. They point to legislation introduced by California Senator Barbara Boxer and Presidential candidate Senator Bernie Sanders that maintains the EPA’s regulatory authority over carbon emissions and even extends it to fracking. As Marlo Lewis writes on GlobalWarming.org:

When was the last time you heard the Sierra Club, NRDC, Bill McKibben or Gina McCarthy say that Massachusetts v. EPA, EPA’s greenhouse gas regulations, the Renewable Fuel Standard, new-car fuel economy standards, DOE energy efficiency standards, the incandescent light bulb ban, Stimulus subsidies for Solyndra, and the proliferation of state-level renewable energy quota are all just bargaining chips they would gladly trade in for a carbon tax?

The carbon tax was actually tried once on a large scale and was not very successful. Australia adopted a carbon tax in 2012 and it was repealed in 2014 after less than two years of operation. The government of Labor Prime Minister Julia Gillard was voted out of office in the process and Conservative Tony Abbott was elected almost entirely on his promise to repeal the tax.

One thing the Australian experience revealed is that farmers are very heavily impacted by a carbon tax. Critics say agriculture is as dependent on fossil fuels as it is on land and sunshine and this turns out to be true. For this reason, it was necessary to exempt the agricultural sector from any permit requirements for using fossil fuels. In addition, there was the Coal Fired Generation Assistance program where $5 billion worth of carbon permits were handed out free to the companies that had the most intensive coal operations. By the time all the exemptions and exceptions were inserted into the legislation, very little was being accomplished.

Cap-and-trade program, the other market mechanism designed to allow prices to substitute for regulation, has been tried in Europe. However, it has proved to be subject to abuses. The Russians sold closed factories from the Soviet era to Europe so they could claim credit for “cutting carbon” in other countries. There were also stories of factories thrown up in China just for the purpose of allowing European countries close them down and to claim “offsets.” The system has since been righted and is having some impact.

President Obama actually offered Republicans a carbon tax at the start of his administration but was rebuffed. So instead he pursued a nationwide cap-and-trade system in Congress. This was rejected by the barest of margins. As a result, he reverted to executive orders through the EPA

Nonetheless, nine northeastern and mid-Atlantic states have joined together to form the Regional Greenhouse Gas Initiative, which operates a cap-and-trade system that has been fairly successful. California also has its own cap-and-trade initiative.

Most economists agree, however, that a cap-and-trade system covering the entire country would be too clumsy and unwieldy and would end up riddled with favoritism. A carbon tax is much cleaner and more uniform. A tax of $30 per ton of carbon would probably raise gasoline prices only 15 cents per gallon, well within the limits of normal fluctuations. The current period of low energy prices would be an ideal time to impose it.

To economists like Irwin Stelzer, it’s clear and doable and makes perfect sense. But in the messy world of politics it’s still dauntingly complicated.

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