Regardless of ‘swap,’ carbon tax too expensive

Published August 23, 2012

Carbon taxes have regained traction this year as several Democrats and even a few Republicans have voiced support for implementing a tax on all energy producers for the amount of carbon dioxide they emit, and then “refunding” the revenue to taxpayers in the form of a cut to the personal income tax, which some economists say distorts the economy more, dollar-per-dollar, than a carbon tax would.
The idea — called a tax “swap” — is intended to cut emissions while expanding the economy, and it may provide the hook that those most concerned about climate change need if emissions-limiting legislation is to have a chance of being passed anytime soon. According to a Stanford University poll, support for a range of policies intended to address climate change fell by 10 percentage points in just the past two years.
Carbon tax supporters have a small window of opportunity after the November elections, during the lame-duck session of Congress, as legislators scramble to avert the “fiscal cliff” of massive tax hikes and modest spending reductions scheduled to begin in January.
It makes sense, however, to be skeptical of tax schemes in which proponents claim “everybody wins.” As the Nobel Prize-winning economist Milton Friedman famously said, “There is no such thing as a free lunch.”
In the case of a carbon tax swap, even if it were truly free, there might not be a lunch to eat. According to a widely accepted formula developed by the National Center for Atmospheric Research, reducing U.S. carbon emissions by 10 percent would bring only a 0.11-degree Fahrenheit reduction of global warming per century — far less than the background effect of natural variability. Many scientists argue that even this puny number significantly overstates the likely effects of emission reductions.
According to the International Energy Agency in Paris, the United States already leads the world in reducing its carbon emissions, having cut them by 7.7 percent in the past six years, but that didn’t prevent a record high in global carbon emissions. The agency reports that the drop in the United States is largely attributable to our switch from burning coal to natural gas, a transition made possible by hydraulic fracturing and other technological and market innovations. Meanwhile, developing countries are increasing their consumption of coal as they race to lift billions of people out of poverty with cheap and reliable energy.
A U.S. carbon tax scheme would have no appreciable effect in reducing global emissions. A smarter investment would be to work on mitigating the effects of unavoidable warming, if any.
While achieving no useful reduction of global carbon emissions, a U.S. carbon tax would lead to higher gasoline and electricity prices, which would raise the cost of almost every good and service we buy, thus diminishing economic growth. Studies of the economic effects of the failed American Clean Energy and Security Act of 2009 (the Waxman-Markey bill) found that it would have destroyed more than 2 million jobs and reduced economic growth by a full percentage point a year. Waxman-Markey called for a cap-and-trade system rather than a carbon tax, but the predicted economic damage was a result of higher energy costs, not inefficiencies inherent in cap-and-trade schemes, so a carbon tax would have a similar effect.
Advocates of the carbon tax swap claim the cut in the personal income tax would provide enough extra savings to taxpayers that they would be able to absorb the higher energy costs. Like all other energy taxes, however, carbon taxes are regressive, hitting lower-income families the hardest. Also, nearly half of all Americans already don’t pay any income taxes. Swapping revenue from the progressive income tax for revenue from a carbon tax means millions of families won’t receive the tax savings needed to absorb the higher energy costs and increased prices for goods and services.
Raising people’s energy costs and the prices of all goods and services is no way to encourage innovation and technological improvement, which are the key factors in changing the way we consume energy. It’s clear that the proposed tax swap will accomplish little other than impeding the very economic growth that enables such progress.
[First published in The Washington Times.]