As much as I admire former Secretary of State George Shultz, and because I do, I was totally flummoxed by a recent Wall Street Journal article he co-authored with economist Nobel laureate Gary Becker. Incredulously, the two senior fellows at Stanford University’s conservative Hoover Institution expressed support for a “revenue neutral” tax on carbon.
They begin by saying “Americans like to compete on a level playing field to win on competitive merits,” then go on to argue that the way to level that playing field is to introduce that tax on what they described as a “major pollutant” to “encourage producers and consumers to shift towards energy sources that emit less carbon — such as toward gas-fired power plants and away from coal-fired plants — and generate greater demand for electric and flex-fuel cars and lesser demand for conventional gasoline-powered cars.”
The op-ed piece proposes that this can be accomplished in two possible ways. It might be imposed upon the population-at-large at the point of consumption (gasoline stations and electricity bills), or alternatively, could be collected as a tax at the production level to “greatly reduce the number of collection points” through the IRS or Social Security Administration. In the case of using IRS, “an annual distribution could be made to every taxpayer and recipient of the Earned Tax Credit. In the case of SSA, the distribution could be made in terms proportionate to the dollars involved, to everyone either paying into the system or receiving benefits from it.”
And You Thought Income Redistribution Was Just a Liberal Democrat Thing?
Yeah, and the amount of the tax would then rise or fall on the basis of the subsequent increase or lessening of “climate effects”… and “should be supplemented by a reasonable and sustained support for research and development in the energy area.”
Sadly, they aren’t the only prominent and usually brilliant conservatives who seem to have sampled the carbon tax Kool-Aid. Reagan economist Arthur Laffer has said he would support such a tax in exchange for a payroll or income tax reduction; Bush 43 economist Greg Mankiw supports a global tax; and Douglas Holtz-Eakin, a senior advisor to John McCain in 2008, wants a tax to provide the energy industry with regulatory “certainty.”
The only certainty I foresee in such a buy-in, is a sacrifice of core conservative principles, an abandonment of common sense, and a deserved loss of political base support.
Been There…Tried That!
President Clinton attempted a similar gambit nearly 20 years ago with a proposed tax on energy use. His so-called “BTU tax”, which would have been imposed upon every segment of the economy, provoked a brutal backlash that should have been no big surprise. He and congressional Democrats soon caved in to demands of a vocal anti-BTU coalition which included small businesses, the agriculture sector, the building trades, the transportation industry, manufacturers and even social-service organizations representing poor and homeless clients who rely upon affordable gasoline and heating fuel.
This experience constituted a “teachable moment.” As the great English writer Samuel Johnson observed, “There is nothing like a hanging to concentrate the mind.” One year later (November 1994), Republicans took over control of the House for the first time in decades.
And It’s Really, Really Stupid, Because…
The whole carbon tax idea is based upon the notion of taxing “bad” fossil energy to make it more expensive and “level the playing field” (without government picking winners and losers, of course), to make “good” energy (determined by politically-favored green-marketing crony capitalists and climate alarmists), more cost-competitive.
As my respected friend Marlo Lewis at the Competitive Enterprise Institute cogently points out, economic arguments that government should tax “bads,” like CO2 emissions, rather than “goods,” like labor and capital, reflect sloppy thinking. “In technical economic terms, only finished products and services are ‘goods’. Labor and capital are inputs, production factors or costs.” Here, energy is a key input without which most labor and capital would be idle or non-existent. And since about 83% of U.S. energy comes from carbon-based fuels, a carbon tax also taxes what economists loosely call “goods.” Lewis refers to this as “free- lunch economics…a recipe for failure or worse.”
The fundamental premise underlying the carbon tax rationale is that it offers economic compensation for harm that fossil fuel consumers inflict upon public health and the environment. Proponents argue that because fossil fuel is therefore underpriced, society uses too much of it. Therefore corrective (“Pigouvian”) taxes should be added to these costs to achieve “efficient” energy markets.
This is exactly the curve being pitched by the International Monetary Fund’s carbon tax proposal to provide punitive compensation for the “social cost of carbon” (SCC). And how does IMF determine that “appropriate” amount of SCC compensation? While acknowledging that “estimates in the literature have varied considerably, ranging from $12 per ton [of emissions] (Nordhaus, 2011) to $85 per ton (Stern, 2006)…[IMF] estimates assume damages from global warming of $25 per ton of CO2 emissions, following the United States Interagency Working Group on Social Cost of Carbon (2010), an extensively reviewed study.”
In addition to pricing that assessed carbon emission tax by the ton, the IMF also recommends a $1.40 per gallon gasoline tax. Never mind that the $25 per ton SCC estimate would actually translate into a lesser $0.22 per gallon tax… or that the purpose of gas taxes is to pay for infrastructure. They are not intended to finance more subsidies for electric Obamacars that aren’t otherwise marketable, and most likely still wouldn’t be….
Leveling the Playing Field? Seriously?
Very much in contrast with those so-called “Green” energy sources, Big Oil receives no cash subsidies. In fact, oil and gas extraction and refining receives even fewer tax breaks than other industries. Whereas Section 199 of the “American Job Creation Act of 2004” provides a 9% deduction from net income for businesses engaged in “qualified production activities”, oil and gas were singled out for a 6% deduction limit.
Many manufacturing industries, including farm equipment, appliances and pharmaceuticals take advantage of the full Section 199 deduction. Even highly profitable companies such as Microsoft and Apple get those benefits, as do some foreign companies that operate factories in the U.S.
Incidentally, of those “cost breaks” attributed to “Fossil Fuel Subsidies and Other Support” in a joint 2010 OECD-IEA report, the single largest expenditure was just over $1 billion for the Strategic Petroleum Reserve which is provided to protect the U.S. from oil shortages. The next largest was just under $1 billion in tax exemptions for farm fuel. The justification for this exemption is that fuel taxes pay for roads, and the farm equipment that benefits from the exemption is technically not supposed to be using the roads. The third largest category provides $570 million for the “Low-Income Energy Assistance Program” (LIHEAP). It is classified as a petroleum subsidy because it theoretically reduces the price of fuel by helping oil companies sell more. Combined, these three programs account for $2.5 billion per year in “oil subsidies.”
Compare this with many Green energy companies that pay no taxes and receive true subsidies… $14 billion in direct cash payments since 2009 to solar, wind and other renewable energy project developers. This includes $9.2 billion given to wind projects, and $2.7 billion given to solar. That doesn’t include another $1.2 billion the Department of Energy has awarded for renewable energy since the beginning of this year. Yet according to EIA figures, total wind accounted for 3.4% of U.S. electricity in 2012, while solar accounted for 0.11%.
Where it comes to leveling the playing field with punitive compensation for social costs, why not consider taxing some of that Green energy for a change? Shouldn’t wind be taxed for environmental damage caused to those endangered birds and bats it slaughters? Shouldn’t solar power be penalized for all the toxic contaminates, including heavy metals used in those solar panels, that must eventually be disposed of…not to mention power plant disruptions to fragile desert ecosystems? And then what about the wholesale land damage and water depletion that results from growing and processing all that corn for ethanol fuel which, by the way, releases just as much atmospheric greenhouse gas as fossil fuels do? Shouldn’t it be taxed as well?
Instead of Leveling the Playing Field, Let’s Level With the Public
First, raise your hand if you truly believe that a “revenue neutral” carbon tax has any chance of being enacted, or if so, staying that way for very long. For those who think that these added costs will be offset by reductions in other taxes, or that the new revenues will be returned to consumers, then go ahead. Help yourself to some more Kool-Aid.
For the rest of you, expect that a newly imposed carbon tax would be revenue neutral only briefly, at best, and then become but one more cookie jar to raid in futile attempts to keep up with escalating demands of government’s spending addiction. And if you harbor any illusions that those tax rates won’t increase over time, consider a lesson taken from European VAT experience. Since it was implemented the initial VAT rate of 10% in Germany has climbed to 19%, in France it has up from 13.6% to 19.6%, and in several other countries VAT rates now exceed 20%.
From a social cost perspective, carbon taxes are, by nature, regressive, meaning that they inflict largest pain burdens upon low-income households. As Marlo Lewis observes, this presents a “Catch-22” dilemma for any Republicans. If on one hand, they offer to support a carbon tax in exchange for cuts in corporate or capital gains taxes, they will be accused of seeking to benefit the rich at the expense of the poor. On the other hand, any “carbon dividends” paid out to offset higher energy price burdens on poor households will create a new class of welfare dependents …a costly consequence for the general public that Democrats are much less inclined to worry about.
Finally, the carbon tax concept is inherently parasitic, a strategy that attacks the vitality of the economic host upon which it feeds. Such “playing field-leveling” penalties, piled on top of other ever-expanding anti-carbon regulatory disincentives, would inhibit growth of one of the few bright spots in the U.S. economy, the development of our vast coal, oil and natural gas deposits.
Such policies, driven by unfounded climate alarmism, motivated by green crony capitalism, and embracing the vision of transforming America into a European-style socialist welfare state, should not be countenanced by any authentic Republican. For the party to do so would not only impose unacceptable social costs, but suicidal political costs as well. In short, it would be stupendously stupid.
A slightly different version of this article appeared in Forbes online on April 16, 2013.