Carbon Tax Straight Talk

A coterie of establishment Republicans met with Vice President Mike Pence and other senior White House officials just weeks ago on behalf of the newly formed Climate Leadership Council (CLC). The council was founded by Ted Halstead, who previously founded the New America think tank. Although touted by some as “centrist” and “non-partisan,” the think tank takes some decidedly left of center political stances; in fact, Jonathan Soros (founder of the hyper-progressive Friends of Democracy Now PAC) sits on the board. Regardless, Halstead has successfully enlisted the support of former Republican Secretaries of State George Shultz and James Baker, along with former Treasury Secretary Hank Paulson, to offer up a carbon tax proposal disguised as a free market “climate change solution.”

The Council’s proposal entails a $40-per-ton escalating carbon tax. The government would redistribute any and all revenue derived from this tax to the public in the form of “dividends.” The Council recommends this be enacted with a border adjustment for imports originating from countries that do not adequately price carbon. Finally, the plan eliminates all existing climate regulations, such as the Clean Power Plan.

Notably, this “tax and dividend” plan is a concept opposed even by numerous other carbon tax supporters. These prior proposals typically have focused on using proceeds from a carbon tax to “pay for” lower corporate income taxes. Some libertarians and conservatives classifying carbon dioxide as a pollutant have sought to use a carbon tax as a pollution pricing alternative to a far more intrusive regulatory apparatus. In many respects, this new proposal diverges greatly from the others in troubling ways; in particular, the “dividend” amounts to a redistribution of wealth from producers (the carbon emitters) to the general populace. And this carbon tax is imposed on top of the pre-existing income tax structure rather than partially replacing it. This CLC carbon tax proposal cannot possibly be described as “limited government” or “free market.”

Ultimately, the whole point of this tax is to make energy derived from fossil fuels so cost prohibitive that consumers begin to change their behavior, thereby reducing emissions. This violates the limited government principles embodied within the ALEC Principles of Taxation. They state, “The proper function of taxation is to raise money for core functions of government, not to direct the behavior of citizens…” and that policymakers should “resist the temptation to use the tax code for social engineering, class warfare and other extraneous purposes.”

As ALEC has articulated before, “Government programs designed to encourage and advance energy technologies should not reduce energy choices or supply. They should not limit the production of electricity, for example, to only politically preferable technologies.” Unfortunately, the Council’s plan goes even further by attempting to shift the flow of capital and production.

Making energy more expensive can also lead to more dire circumstances. For instance, only one in ten Europeans today are unable to adequately heat their homes at an affordable price. Government manipulation of markets artificially inflates the price of fossil fuels benefiting politically-preferred forms of energy and a favored class of business interests.  And, politically preferred as they are, lifecycle analysis calls into question the extent of carbon-reducing advantages of some renewables. For instance, most solar panels placed in operation offset the carbon emitted during its manufacturing process only after two years of operation.

The Council’s plan for allocating the dividends derived from the carbon tax is also anathema to free market principles. Returning this money to the American people on an “equal” basis (such that a family of four would receive approximately $2,000 under a $40-per-ton tax) without regard for how much or how little that family spent on increased energy costs is, fundamentally, an example of wealth redistribution. Conservatives rightfully howled when then- candidate Obama spoke of “spreading the wealth around” on the campaign trail in 2008. Should now be any different?

It’s not just that the redistribution violates free market principles. The inefficiency is astounding.

In the best case scenario, this plan results in a small net loss to both the consumer and the producer. Carbon emitters pay the government, consumers pay the emitters through increased costs, and then the government gives a check to the consumer to compensate for the hike in energy costs. In effect, the government becomes the middle man on carbon-intensive purchases. The taxpayer bears the administrative costs of this “tax and dividend” process.

But this small net negative economic loss is not the only possibility. The producer may choose to (a) find pricier alternative means to manufacture goods in less carbon-intensive manner of (b) cease to manufacture due to the impossibility of competing profitability due to higher prices deterring consumers. In scenario (a), the consumer is forced to pay the higher costs for the end product without a dividend offset. In scenario (b), consumer choices are reduced, AND the consumer must purchase presumably pricier or less desirable alternative products.
The Council’s plan ignores the political realities of today. When Democrats controlled both the Senate and the White House, proponents of similar carbon taxes would throw a bone to conservative policymakers by suggesting that all federal climate regulations would be eliminated in exchange for their carbon tax. Such a “swap” is entirely unnecessary given that President Donald J. Trump has repeatedly vowed to eliminate President Obama’s Climate Action Plan. In other words, the Clean Power Plan can now realistically be scaled back without having to be replaced by a carbon tax. Why would conservatives today want to replace a heavy-handed regulatory approach with a perhaps slightly less heavy-handed approach when employing neither approach is also a viable possibility?

This plan further ignores political reality as politicians are unlikely to ever agree on what should be done with the revenue derived from the carbon tax. Whereas the Council charmingly, if not naively, believes the government will return this money to the American people in the form of dividends, offering the federal government a new stream of revenue is a dangerous proposition. Some policymakers will want to use this money for deficit-reduction. Others, as evidenced by the failure of the proposed revenue-neutral carbon tax in Washington State this past November, will prefer to use this money to expand government programs. Even if the politicians of today were to reach an agreement on revenue-neutrality, there is no guarantee that the politicians of tomorrow will abide by the same terms.

Shultz and Baker label a massive tax increase and economic meddling by the federal government as “embodying the conservative principles of free markets and limited government” but this carbon tax will needlessly further distort energy markets, harm consumers, expand government bureaucracy, and have minimal (if any) effect on global climate change. For these reasons, ALEC remains steadfastly opposed to “all Federal and state efforts to establish a carbon tax on fuels for electricity and transportation.” Two relevant ALEC task forces (Energy, Environment and  Agriculture along with Tax and Fiscal Policy) overwhelmingly adopted this language after much consideration. Conservatives and libertarians tempted to embrace a carbon tax will be well served to ask themselves whether or not such a policy can realistically be expected to limit government or solve environmental problems.