Why Everyone Should Love a Carbon Tax

Why Everyone Should Love a Carbon Tax
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Even during a time of national concern over the economy, a recent study published in Nature Climate Change concluded that the average American would be willing to spend up to 13% more on electricity bills to support clean energy. In the past several decades, Americans have shown a willingness to help the environment if they know new laws will actually help. And today, they especially like the idea of ditching our dependence on Middle Eastern oil.

Despite popular support for a change in direction, the Obama Administration failed to deliver on its promise of reforming our energy (and by extension, climate) policy. The reason is because the Democrats insisted on cap-and-trade (just like they are currently doing in California), when they should have been pushing for a carbon tax.

In 2009, House Democrats cobbled together a slim majority, 219-212, to pass a cap-and-trade bill, the American Clean Energy and Security Act. Their success ended there. Even though Democrats had a filibuster-proof majority for several months between 2009-2010, any climate bill was likely dead-on-arrival in the Senate due to lack of support – including among Democrats. (Then-candidate Joe Manchin of West Virginia famously ran an ad where he shot the bill with a rifle.)

Most of Obama’s political capital had been spent on health care, and there just wasn’t the appetite to deal with another controversial piece of legislation.

In truth, cap-and-trade to reduce carbon emissions was flawed from Day One. There are at least four major hurdles for implementing this policy in the United States.

First, proponents of climate action are not very good at making their case. Cap-and-trade has actually worked before, but supporters rarely mention it. Remember acid rain? That problem was mitigated by a successful cap-and-trade system implemented by President George H. W. Bush to limit sulfur dioxide emissions, and even conservatives supported it. The public should be reminded that this policy worked, but cap-and-trade supporters appear to have forgotten. Instead, climate change activists spend their time calling their opponents “deniers,” which isn’t helpful for advancing the argument.

Second, a cap-and-trade exchange adds a new layer of bureaucracy. Unlike a simple tax, it creates a complicated system, and as Fareed Zakaria wisely notes, complex systems are more vulnerable to corruption. Many Americans hate our federal income tax system precisely because of all the loopholes and exemptions the well connected have extracted from politicians. The same sort of chicanery would be more likely under a cap-and-trade scheme. Alternatively, a carbon tax that is applied in egalitarian fashion lends itself to transparency and therefore compliance.

Third, the carbon market created by cap-and-trade would be subjected to the same laws of supply and demand that drive other markets. What happens when large swings occur in the price of carbon? We already nervously watch the price of a barrel of oil on a daily basis. People would have to worry about the price of carbon too, and large swings in the price of goods would harm America’s poorest citizens the most.

Finally, even if it worked, cap-and-trade may not be very popular. A voluntary, legally binding cap-and-trade scheme was already tried: It was called the Chicago Climate Exchange. After only seven years in operation, it closed in 2010 due to lack of interest. A federally mandated system may cause severe political backlash.

A carbon tax prevents all of these problems. It is easy to explain, adds little to no extra bureaucracy, and provides price stability. Those factors will make it more popular – and hence, more effective – than cap-and-trade.

Indeed, a Pigovian tax to reduce carbon emissions already has a wide base of Republican support. For instance, former George W. Bush economic advisor N. Gregory Mankiw supports it with an offsetting reduction in payroll taxes. Conservative commentator Charles Krauthammer supports a similar policy in regard to a gasoline tax. In today’s political environment, that’s about as close to unanimous agreement as we can hope for.

Additionally, a carbon tax can be adjusted to reflect the relative desirability of energy sources. Coal and oil, which are very dirty, would be taxed the greatest. Natural gas, which is cleaner, would be taxed less. Clean energy, including nuclear, wouldn’t be taxed at all.

The revenue from the carbon tax could then be used to fund basic research in alternative energy. This is a far better cure for our energy ills than subsidizing inefficient green technology companies that cannot yet compete in the marketplace.

Compromise always makes everyone a little unhappy, but in this case, it would serve the greater good in terms of promoting sound energy and economic policies. If the environment is truly important to Democrats, they should be willing to tolerate natural gas and nuclear power. If energy independence is important to Republicans, they should be willing to tolerate a small corrective tax.

And if having a cleaner, more efficient economy is important to everyone, then Democrats and Republicans should tolerate each other.

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