Conservatives debate a carbon tax

The discussion of a carbon tax continues. Conservatives met recently in Washington, D.C., to debate the mertis of a carbon taxt at an event hosted by the R Street Institute and the Heartland Institute, featuring representatives with opposing viewpoints from four conservative think tanks.

A 2013 C2ES brief found that a carbon tax was one way to put a price on carbon emissions, reduce greenhouse gas emissions, and raise significant revenue for the federal government. A tax starting at about $16 per ton of carbon dioxide (CO2) in 2014 and rising 4 percent over inflation per year would raise more than $1.1 trillion in the first 10 years, and more than $2.7 trillion over a 20-year period. This revenue could fund a wide range of things, including deficit reduction, a reduction in statutory corporate income tax rates from 35 percent to 28 percent (often cited as a goal by both conservatives and liberals), and research and development into low-emitting technology.  Importantly, such a carbon tax could also reduce CO2 emissions by 9.3 billion tons over 20 years.

In the debate, former Rep. Bob Inglis (R-SC), executive director of the Energy and Enterprise Institute, and Andrew Moylan, senior fellow at the R Street Institute, argued for the adoption of a carbon tax that addresses regulatory and tax reform in one package. For them, the market-based approach of a carbon tax offered a better alternative than the de facto price on carbon embodied in EPA carbon emission regulations. They argued that engaging on the merits of a carbon tax now offers conservatives a better chance to shape any future policy and have it reflect conservative principles than sitting back and reacting to liberal proposals, as was done with health care. 

Inglis and Moylan furthermore argued that a proposal must meet three “core” requirements. It must: be revenue-neutral so that it does not increase the size of government; reduce or eliminate existing taxes or tax credits outright; and pre-empt EPA greenhouse gas regulations.

David Kreutzer, research fellow at the Heritage Foundation, and James Taylor, senior fellow at the Heartland Institute, agreed with these principles, but opposed the idea of a carbon tax.  Kreutzer and Taylor rejected the idea that liberals would willingly give up EPA’s greenhouse gas regulations in favor of a carbon tax. Moylan countered that they certainly wouldn’t do so without replacing those powers with other measures that could reduce emissions.

Such pre-emption is not without precedent. The 2009 Waxman-Markey climate bill would have partially pre-empted EPA’s existing authority to regulate greenhouse gases.  In particular, Waxman-Markey would have prevented EPA from regulating greenhouse gases through the “New Source Review” and “National Ambient Air Quality Standards” provisions of the Clean Air Act, and from establishing greenhouse gas performance standards for stationary sources covered by the emissions trading cap. Additionally, EPA would have been prohibited from deeming greenhouse gases as criteria, hazardous or international air pollutants solely on the basis of their climatic effects. At the same time, however, Waxman-Markey would have preserved Clean Air Act authority over mobile sources of greenhouse gases, such as passenger vehicles. While not all environmental organizations supported this pre-emption, others did with the understanding that Waxman-Markey's program would have established a price on carbon and delivered significant emission reductions in a cost-effective manner.  Whether EPA pre-emption would be part of any carbon tax framework is, of course, uncertain. 

One point of disagreement between the panelists was on how to use the potential revenue and, specifically, what was meant by “revenue neutrality.” As defined in the C2ES tax primer, revenue neutrality implies that a revenue gain would be accompanied by a tax or spending reduction. Inglis argued that taxing something we want less of (pollution) rather than something we want more of (productive labor and investment) intuitively makes sense.

(The C2ES primer also points out that a carbon tax would have some resemblance to a broad consumption tax, and would be more economically efficient (less distortionary) than many other taxes. That means there could be an economic case — without even considering the environmental benefits — for a revenue-neutral tax reform that reduces revenue from a more distortionary tax and replaces it with a tax that addresses a market failure, like a carbon tax.)

Kreutzer and Taylor rejected this notion as fantasy. Kreutzer disagreed with the debate’s premise that climate change was occurring, given that CO2 is nontoxic, and both apparently disagreed with the notion that a carbon tax would ever be revenue neutral. Taylor suggested that Inglis and Moylan were “smoking pixie dust” if they thought liberals would cut other taxes in favor of a carbon tax. Taylor was also distrustful of government honoring any promises on a carbon tax, pointing to President George H.W. Bush’s “read my lips” pledge not to raise taxes and President Reagan’s 1986 amnesty for illegal immigrants. If a carbon tax is enacted, Kreutzer and Taylor believe the resulting revenue would present too great of a temptation not to divert it for other social purposes rather than reducing existing taxes.

Taylor also mentioned the issue of declining tax revenues over time. In the long run, the tax base (i.e., emissions) would shrink more quickly than the tax rate would rise, and, as a result, total revenue would fall. Taylor suggested these effects would be immediate, with consumers paying more for energy and government having less revenue, and that taxes would have to go up to make up for the lost revenue. Neither side explored this issue further — passing up an opportunity to explore why declining revenues would be a problem for someone wanting to shrink the government.

The prospects for enacting a carbon tax are considered poor in the short term. Neither the Obama Administration nor, with few exceptions, congressional leadership have expressed interest in advancing a carbon tax. There remains hope, however, that eventually our policymakers will recognize that placing a price on carbon is the best way to provide a continuing incentive to reduce emissions and deploy innovative clean energy technology.