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How to Tax Carbon

Conservatives can fight climate change without growing government.

Rather than acknowledge climate change as a major public-policy issue and draft a serious proposal to deal with it—to counter the left’s plan to expand dramatically the size, scope, and cost of the federal government—the right has too long pursued a course of obstructionism that amounts to little more than political theatre.

If this sounds familiar, it’s because similar circumstances allowed Democrats to pass Obamacare after decades of agitating for universal healthcare. Liberals spent years building a policy infrastructure to advocate for greater government involvement in healthcare, while according to Reason’s Peter Suderman,

Republicans, on the other hand, all but ignored health policy for all those years. Yes, there were think tank wonks and a handful of administration staffers who were deep in the weeds of health policy, but the party and its allies didn’t invest in developing ideas or consensus. Your average Republican legislator didn’t have a great grasp of the issue, and would have struggled to tell you what the party was actually for when it came to health care.

So it is today with climate change. Despite the consensus of 97 percent of scientists that the planet is warming and that human activity is a significant part of the cause, a March 2013 Pew Research Center poll found that just 44 percent of Republicans believe in climate change at all. To the extent that establishment conservatives talk about climate change, it’s to question its scientific validity or complain about the left’s policy response.

This is a mistake. No amount of hand-waving can change the science of climate change, mitigate its likely consequences for the environment, or wipe away the legal authority that the federal government already has to regulate carbon dioxide emissions.

Even if Congress does nothing, the Environmental Protection Agency can regulate carbon dioxide emissions through the spectacularly ill-fitting mechanisms of the Clean Air Act. That law, a creature of the 1970s regulatory state, was designed to regulate—within circumscribed geographical areas—gases such as benzene or oxides of nitrogen that pose immediate risks to human health in high concentrations.

Carbon dioxide emissions, by contrast, are global in nature. A ton of CO2 emitted in Peoria or Pyongyang has basically the same impact on the environment and will remain in the atmosphere for decades. Carbon dioxide also happens to be necessary for plant life and does not by itself pose immediate negative consequences for human health.

Nonetheless, the U.S. Supreme Court’s 2007 decision in Massachusetts v. EPA found the agency has authority to regulate greenhouse gases if they are found to endanger public health. In the aftermath of this ruling, the EPA issued an “endangerment finding” that asserted the agency’s regulatory authority under the Clean Air Act. Although there are good reasons to question the court’s decision, it is now settled law. Subsequent efforts to reverse the finding through litigation have failed, and a landmark U.S. Senate vote to strip the EPA’s authority in 2010 attracted only 53 of the 60 needed votes.

In a speech at Georgetown University in June, President Obama outlined the EPA’s complex and expensive scheme to regulate greenhouse gas emissions from existing power plants, a plan likely to cause serious disruption to electricity generation and to the economy as a whole. Earlier executive action had already applied stricter standards for building new electricity-generation facilities, making it effectively impossible to build coal-fired power plants. But applying the heavy hand of the EPA to existing facilities is poised to be the game changer.

The best estimates about what such a regulatory scheme will cost are staggering. A study from the National Association of Manufacturers estimated that six greenhouse gas regulations alone will weigh the economy down by a minimum of $142 billion per year and potentially, when other costs are included, as much as $630 billion per year—nearly 4 percent of U.S. GDP in 2012. That’s roughly equivalent to half of all corporate income-tax revenues, imposed in a highly uneven and opaque manner. Even worse, costly carbon regulation will be layered on top of all the other burdens borne by businesses and individuals with no offsets whatsoever.

While conservatives continue to fight a losing battle on the science of climate change, the EPA is moving forward with regulation. As with healthcare reform, unless there’s a miraculous Republican revolution delivering 60 Senate votes and a Republican president in 2016, carbon-reduction efforts almost certainly are here to stay. The question that conservatives must now grapple with is whether we’ll achieve those emissions reductions through onerous regulation with no attention paid to cost, as the left desires, or through an approach based on limited government and open markets.

The best policy to address greenhouse gas emissions, while adhering to conservative principles, is a carbon tax combined with tax and regulatory reform. Merely uttering the phrase “carbon tax” strikes fear into the heart of many on the right. This is understandable, to the extent that what conservatives actually fear is a plan that would layer energy taxes on top of the overly burdensome tax and regulatory regime we already have.

But one need not engage in climate alarmism or capitulate to big government to make a case for a revenue-neutral carbon tax. In fact, President Obama’s recent speech helps illustrate why the right needs to consider one more seriously.

A conservative carbon tax has three key components: revenue neutrality, elimination of existing taxes, and regulatory reform. When combined, these policies would yield a smaller, less powerful government; a tax code more conducive to investment and growth; and the emissions reductions the law says we must achieve.

The first and arguably most important component is absolute, bona fide revenue neutrality. The federal government is already too large and expensive. Conservatives routinely oppose efforts by the left to raise revenue in order to shore up lavish spending and broken entitlement programs. A carbon tax should no more be used to fund bigger government than any other tax. Every single dollar raised by a carbon tax must be devoted to tax reductions elsewhere in the code.

There are alternative carbon-tax proposals that make bogus claims of revenue neutrality. For example, the so-called “fee and dividend” model pushed by some climate advocates and members of Congress would levy a fee on carbon dioxide emissions that then would be returned to citizens through some sort of flat dividend payment. Such a scheme easily could prove vulnerable to abuse: one can imagine dividends would be suspended in years of high deficits or that the program would morph into a slush fund that flows to progressives’ pet projects.

Instead of empowering government to generate a pot of money and relying on the beneficence of elected officials to return it to the people, reform must devote every dime of carbon-tax revenue to reducing other tax rates or abolishing other taxes altogether. Turning on one revenue stream while turning off others is how we prevent growth in government.


Which brings us to the second component of a conservative carbon tax: outright elimination of some of the most damaging and anti-growth levies on the books. For example, a Massachusetts Institute of Technology analysis estimates that a $20 per ton tax on carbon dioxide emissions could generate roughly $1.5 trillion in revenue over ten years. That’s enough to allow for the complete elimination of several levies that conservatives rightly regard as structurally deficient or duplicative: capital gains and dividends taxes, the death tax and tariffs.

If the average economist sat down to draft an ideal tax code from scratch, it’s unlikely that any of the aforementioned levies would exist. Capital gains and dividends already are taxed at the corporate level, and taxing them again when received by individuals is duplicative. Similarly, the death tax places a new levy on assets on which taxes already were paid. And tariffs, though they now produce a relatively small share of federal revenue, erect substantial barriers to international trade.

The consensus of conservative economic thought today is that governments should reform taxation to focus on consumption rather than income or investment. In other words, governments should target taxation on “bads” like pollution rather than on good things like labor, wages, and profits in order to raise revenue with as light a touch on economic growth as possible. This is why such prominent conservative economists as Kevin Hassett, Glenn Hubbard, Greg Mankiw, and Art Laffer have expressed support for a carbon tax swap. (The way this philosophy has manifested itself on the state level is in ongoing efforts, primarily driven by Republicans in places like North Carolina, to reduce or eliminate income taxation in favor of expanded sales taxes.)

The final component of a conservative carbon tax plan is wholesale reform of regulations that are intended to reduce greenhouse gas emissions. Because of its cost and complexity, a carbon tax should not be layered atop an existing regime to regulate carbon emissions. Instead, we should preempt the EPA’s ability to regulate emissions from power plants while also considering elimination of policies like Corporate Average Fuel Economy standards for automobiles. In short, the carbon tax should supplant entirely the myriad regulations that exist to reduce emissions. After all, if the tax on carbon is priced properly so that it “internalizes the externality” posed by emitting a ton of the gas, there is no need for other policies to achieve reductions.

A carbon tax will not solve climate change in and of itself. In fact, it can do little more than put a dent in the problem, since the United States accounts for just 16 percent of global emissions, compared to China’s 29 percent. Indeed, the most important thing the U.S. could do to address a changing climate is to ensure that it is wealthy and prosperous, to better afford necessary adaptation and mitigation efforts.

But adopting a revenue-neutral carbon tax with regulatory preemption will do two very important things. The first is to provide a counter to liberal big-government policies that are already underway: conservatives currently are utterly absent from an important policy debate that will advance without their input. The second is to establish a tax code that is more pro-growth. Eliminating onerous EPA regulations and swapping out taxes on positive things like investment in favor of taxes on energy use would lighten the load placed on businesses and individuals by the federal government, giving the U.S. a larger and more vibrant economy to help absorb future climate impacts.

The good news is that this debate isn’t entirely theoretical. There are various forms of carbon taxes already in effect around the world. Perhaps the example most comparable to the policy described here is in the Canadian province of British Columbia. That province has had a tax on carbon emissions since 2007, a levy now set at 30 Canadian dollars per metric ton, with the revenue devoted to reducing other taxes. sep-issuethumb

Early returns on the policy are quite positive. A recent study found that the province’s gross domestic product growth has outpaced the rest of Canada, while its corporate income tax rate has been reduced to among the lowest anywhere in the G8 countries. Despite concerns that it might grow government, the tax has stayed revenue neutral and enjoys broad public support. Polling of business and community leaders by the Pembina Institute found 64 percent believe the tax has been a positive move.

Reducing carbon emissions doesn’t need to entail bigger government and a damaged economy. A conservative carbon tax could achieve the same goals President Obama seeks to achieve without expanding federal power or contracting economic opportunity. A price signal operating in a free and open market would encourage people to transition to less carbon-intensive energy sources, while a clean tax swap and streamlined regulatory regime would ensure that government doesn’t grow larger and more powerful.

Conservatives should seize the opportunity to emphasize the superiority of free markets over central planning. A revenue-neutral carbon tax with regulatory reform would do exactly that.

Andrew Moylan is senior fellow and outreach director for the R Street Institute, a think tank that advocates free markets; limited, effective government; and responsible environmental stewardship.



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