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CARBON TAX CLAIMS DON’T HOLD UP

April 09, 2013 J,

In a recent opinion piece in the Wall Street Journal, George Shultz and Gary Becker attempt to argue, again, why a revenue-neutral carbon tax is good policy.  Their piece makes several easily refutable claims; let’s take each in turn:

Claim: “A carbon tax would encourage producers and consumers to shift toward energy sources that emit less carbon.” 

While of course it’s true that anytime you tax something you get less of it, the real question we should be considering is what is the price at which the substitution effect occurs?  In other words, how high of a tax do we have to put on carbon before other energy sources become competitive?  Otherwise all we would be doing is raising our energy costs without any behavioral change.  The commonly bandied about tax on carbon would be in the range of $20-25 per ton.  This is nowhere near the price you would need to make wind, solar, biofuels, etc. price-competitive.  The real tipping point is in the hundreds of dollars per ton, a price no one asserts is politically or economically feasible.

Claim: A carbon tax should be revenue neutral and “not for financing some other government programs or expanding the government sector.”

In principle, a revenue-neutral tax doesn’t grow government; however, the manner in which it is made revenue neutral makes a huge difference.  A carbon tax is quite burdensome to low- and middle-income Americans.  This makes it infeasible to advance a carbon tax without a large wealth transfer to these Americans to mitigate the impacts on their budgets (and win the votes of their representatives).  This transfer itself is a new “government program” that will easily be distorted to accomplish redistributive goals that are entirely unrelated to the banal statement that “a revenue-neutral carbon tax won’t grow government.”

Claim: “Revenue neutrality means that [a carbon tax] will not have a fiscal drag on economic growth.”

This claim is cute due to a cleverly placed adjective.  A revenue-neutral carbon tax may not be an explicit fiscal drag on the economy, but what about the other burdens it will inflict.  Economic activity, energy consumption and carbon emissions are very tightly intertwined.  Reduce any one of those and you’re likely to get less of the other two as well.  U.S. carbon and other GHG emissions are down sharply over the past five years due in large part to the stagnant U.S. economy.  Raising the price of energy, which is carbon-tax proponents’ explicit goal, will crimp the economic recovery.  Energy costs are embedded in every good we buy, every piece of food we eat and every service for which we contract.  Higher energy prices may not be a fiscal drag but they’ll be a large economic drag.  As the economy sputters under higher energy costs other federal revenue streams (income taxes, investment taxes, etc.) will suffer.  This in turn will put a fiscal hit on the federal budget.

Claim: “An administratively more efficient way of imposing the tax, however, would be to collect it at the level of production, which would reduce greatly the number of collection points.”

It’s true that moving the point of taxation further up the production stream does simplify the administrative process of collecting a tax.  However, this approach also shields consumers from knowing what they’re paying.  Transparency is one core principle of proper taxation.  It’s critical that consumers know what they are paying and to whom.  We’re already suffering from a dearth of energy-tax transparency.  Unlike most other consumers, drivers at the pump aren’t shown what portion of their final price is tax.  Over the past decade that percentage has fluctuated between 15 and 30 percent of the purchase price.  An upstream carbon tax would exacerbate this information vacuum.

Shultz and Becker realize this issue on the rebate side, where they propose to issue checks to EITC recipients, Social Security beneficiaries and taxpayers labeled “Your carbon dividend.”  Transparency cuts both ways, and consumers should know up front what they’re paying, not just when the “free rebate check” shows up in the mail.

Claim: “Funds collected should go into an identified fund and the amounts flowing in and out should be clearly visible … so as to keep the money from being spent on general government purposes.”

Anyone with any exposure to the federal budget and finances knows this one is laughable on its face.  Congress has tried this design before with various federal “trust funds,” most infamously the Social Security OASI and DI trust funds.  It’s one of the immutable laws of government that any money that flows from the private to public sector will be raided and spent, regardless of accounting protections that are ostensibly put in place.  A $20 per ton carbon tax is likely to raise roughly a $1 trillion over ten years.  An objective look at Congress’s track record shows that they cannot be trusted not to spend that money on their favorite boondoggle or transfer scheme.

Claim: “The tax should also further increase over time if the apparent severity of the climate effects is growing and, alternatively, the tax should fall over time if the severity appears to be decreasing.”

This flawed policy design gets at the real core of why a carbon tax is a bad idea.  Shultz and Becker are basically trying to set up a safety value here by saying that they don’t want the carbon tax to be a permanent revenue stream; they want to tie it to global warming.  (Let’s leave aside for a moment who and how we would judge “the apparent severity of the climate effects.”)  The problem is that a U.S. carbon tax will have no measureable effect on global temperatures.  The failed Waxman-Markey cap-and-trade carbon tax was estimated to only reduce global temperatures by nine hundredths of one degree Fahrenheit … by 2050.  Not only is that impact so small that you couldn’t actually measure it, it assumes that carbon output drops by 85 percent over the period.  The reasons for this are quite obvious:  the largest drivers of carbon and other GHG emissions in the future will not be subject to the regime.  China and other rapidly developing nations have steeply increasing emissions rates that will not be affected by the U.S. tax.  Since carbon and GHG emissions are globally mixed, their emissions are as relevant to this discussion as ours.  Living with an escalating carbon tax regime tied to other nations’ behaviors under the promise that when climate effects reverse the tax will drop is simply disingenuous.

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