With the 2012 election underway and the Congressional Supercommittee looking for ways to fix the nation's fiscal woes, pundits on the left and right have raised the idea of a carbon tax. At one point, I was somewhat convinced that a revenue-neutral carbon tax could make sense: done in good faith, I thought it could rationalize some of the distortions of our tax code while providing some near-term air pollution reduction benefits, and possibly, some tiny environmental benefit due to reductions in greenhouse gas emissions.
"When economies are already laboring under too much spending... implementing a carbon tax would be a mistake."
I have concluded, however, that the chances of seeing a properly valued, revenue-neutral carbon tax are about as likely as the chances of seeing a unicorn-powered spaceship. Instead, I'm now convinced that the idea would cause nothing but misery. Here are a few reasons why:
There won't be revenue neutrality--As we've watched states loot "dedicated" eco-taxes for general revenue (as they have looted pretty much every other "dedicated" revenue stream over time), it's obvious that a carbon tax would simply become another general revenue raiser. Lock boxes are as dead as Al Gore's electoral chances.
There's no environmental gain--There would be virtually no environmental benefits to unilateral greenhouse gas emission reductions by developed countries (whose GHG levels are already flat and slowly declining), while developing countries are pouring out virtually every kind of pollutant with joyous abandon. Some argue that we'll get "co-benefits" from reducing other pollutants, such as particulates. Well, we already have highly effective (if economically damaging) regulations for conventional pollutants. If they're not working, they should be fixed. And we have ample evidence that a carbon tax would have limited impact: if $4 per gallon gas won't reduce consumer demand, how is adding another 10 cents, 50 cents, or dollar going to do so?
There's more economic pain--Studies continue to show that carbon taxation, through its influence on energy prices would cause considerable harm. First, they're recessionary - high energy costs reduce economic productivity, and are passed along to consumers in everything they buy, from medical treatments to food and clothing. In fact, research at AEI suggests that half of the total spending consumers do on energy is invisible to them: its costs are embedded in the things they buy and the services they use. The more things cost, the less people consume, which means less production, less economic growth, and less jobs.
Second, they're regressive - Most analysis shows that energy taxes are highly regressive. After all, it's not the rich people driving around old cars with poor mileage, living in old houses with poor insulation and inefficient appliances, have limited career mobility and lengthy commutes from poor communities into where the jobs are in wealthier communities.
Finally, they reduce economic competiveness - energy taxes also make countries less competitive when it comes to exports, particularly when they're competing against countries that don't impose comparable taxes. Carbon tax proponents argue that such things can be handled with border taxes on imported goods from non-carbon-priced regimes, but does anyone really believe that such activities will not set off innumerable trade wars?
They are dishonest policy--If climate alarmists really thought that the goal was to get the price right, you'd hear them promising to remove all of the other regulations of carbon emissions if they got their carbon tax. They'd talk about repealing vehicle efficiency standards, appliance standards, technology standards, emission standards, unraveling regional trading systems, ending low-carbon energy subsidies, and more. But they don't.
Climate change alarmists have never been shy in admitting that they will not be content with a carbon tax, and will still want additional layers of carbon-suppression through cap-and-trade as well as regulation. To climate activists, a carbon tax is nothing but a step in carbon-seduction. "Oh, come on, you've already accepted the tax, now let's do cap-and-trade, and regulation." This will result in rampant over-pricing of carbon emissions and energy.
As the country grapples with economic havoc, some are pointing to carbon taxes as a potential solution to the government's revenue shortage. Carbon taxes might be "better" than cap-and-trade or regulations, but then, in a train-wreck, losing a hand is better than losing a forearm, which is better than losing an entire arm. Most would rather skip the wreck.
Even in flush economic times, carbon taxes would be bad policy. When economies are already laboring under too much spending, and are at diminishing-return levels of taxation, implementing a carbon tax would be a mistake.
Kenneth P. Green is a resident scholar at AEI.