Some ideas in Washington never seem to go away. They lie dormant, hibernate, and kept alive by the cottage industries supporting them. They rise now and again, chains rattling, grandiose plans set forth. The last few days has seen such a resurrected idea in the form of the “Carbon Tax.
Imposing a tax on energy, carbon or otherwise, has been around since the 1970’s. Initially proposed by the Carter Administration, it was again put forth in the early days of the Clinton Administration. It received additional attention from global warming advocates during the consideration of the ill-fated Cap and Trade bill in the last Congress.
In a political vacuum, a carbon tax would seem to have some merit depending on its purpose, scope and when stacked up against the desire by some to raise federal revenue, subsidize non-carbon fuels by reducing the price gap with non-fossil fuels or to reduce emissions of carbon dioxide into the atmosphere.
At the beginning of this year, House Energy and Commerce ranking member Henry Waxman (D-Calif.), Rep. Ed Markey (D-Mass.) and former GOP Reps. Sherwood Boehlert and Wayne Gilchrest floated the concept of a carbon tax in a kind of trade off for Cap and Trade. Their proposal according to them would decrease greenhouse gas emissions and raise more than $200 billion over ten years. The proposal did not receive any serious consideration.
In the latest burst of carbon tax fever, there was a meeting hosted last week by the American Enterprise Institute of a variety of groups-both conservative and liberal- to discuss the vitality of the tax. Each group seemed to have its own reason for interest in the topic-environmental, fiscal, and anti-regulatory. The agenda was entitled, “Price Carbon Campaign / Lame Duck Initiative: A Carbon Pollution Tax in Fiscal and Tax Reform.” Do you think the purpose could be any clearer?
The agenda for the meeting showed a mix of odd fellows from academic, think tanks, political types, lobbyists, environmental groups, including the Union of Concerned Scientists, AEI, Public Citizen, the free-market group R Street, the Center on Budget and Policy Priorities, ConservAmerica, and Taxpayers for Common Sense among others.
So what is attractive about a carbon tax? In essence,
- A carbon tax is a direct tax on the carbon content of fossil fuels such as coal, oil and natural gas. To a certain extent regulated a market without the regulation.
- A carbon tax through an economist prism is efficient and because it raises prices it spurs carbon-reducing investment.
- Because prices of fuel will rise, fuel switching will occur to alternative non-carbon sources, thus reducing carbon dioxide emissions.
- Carbon taxes can be put in place gradually to allow consumers and businesses to account for their impact.
- A carbon tax can be a source of enormous revenue, which can be spent by the Government, used to reduce the deficit, used to lessen the impact of the increased cost of energy or redistributed to reduce other taxes.
There are, of course, countervailing views.
- Because of the global natural of many businesses, production will just shift to countries with no or lower carbon taxes. This is the same problem with cap and trade absent an international protocol. Less energy use means less revenue raised.
- It is very difficult to set the level of external cost and how much the tax should be. Too high gives dire economic consequences, too low and it is ineffective.
- Possibility of tax evasion. Higher taxes may encourage firms to hide carbon emissions.
- If demand is price inelastic, the tax may have to be very high to reduce demand significantly.
- Consumers dislike new taxes and the political climate does not lend itself to imposing new burdens given the overall economy doldrums.
- Energy taxes are by nature regressive.
- Carbon taxes will raise the cost of energy and revenues raised will be diverted to more Government spending.
Several nations have already passed carbon tax laws or have presented a carbon tax bill. Nations which have implemented a tax, include, South Africa, Japan, India, Taiwan, New Zealand, France, Denmark, Republic of Ireland, and the Netherlands, More importantly, and noteworthy, is the recent Australia experience where Clean Energy Futures Plan became law on July 2012, setting a cost of A$23 ($23.80 USD) on each metric ton of greenhouse-gas emissions. The carbon levy is fixed until 2015 and then a more-or-less Cap and Trade system will be installed.
The Australian scheme operates in two phases: a fixed-price phase that began on July 1, 2012, followed by a floating-price phase commencing automatically on July 1 2015. It covers emissions from the stationary energy; industrial processing, resources and waste sectors or about 400-500 sources each having more that 25,000 tons in greenhouse gas emissions from covered activities. Entities will be required to surrender carbon permits to cover those emissions.
Emissions-intensive trade-exposed industries and coal-fired power generators will initially be eligible to receive assistance, primarily in the form of free carbon permits. The plan also provides huge subsidies to consumers and increases pensions in an attempt to try to offset higher price for energy to be forthcoming. The plan costs the government billions of dollars in its few first years.
It is not clear what form any credible carbon tax would be considered. It would be restricted to electric generation, industrial use or some broader excise tax on all energy use.
The politics of the carbon tax are fairly clear at this point, and it has to be said, passage of any new tax scheme is highly doubtful. House Speaker John Boehner (R-Ohio) and Senate Minority Leader Mitch McConnell (R-Ky.) have both voiced their opposition. This is no surprise but it shows the quality of the opposition.
However, there are those who believe that eventually some Republicans can be convinced that a carbon tax is an alternative to EPA climate regulation and may be a part of overall tax reform to supply or supplant revenue for the government. However, given the toxic effect of the cap and trade vote in 2010, it is unlikely this subject will be any less lethal for many member of Congress. It simply cannot stand on its own, no matter how many meetings are held.