Carbon Tax: A Conservative Idea

Whose Time Has Come?

Marlo Lewis, Ph.D.
Senior Fellow
Competitive Enterprise Institute
marlo.lewis@cei.org
202-331-2267

Self-Identified Conservatives Who
Advocate Carbon Taxes
Irwin Stelzer, editor, Weekly Standard
Bob Inglis, former GOP Congressman, South Carolina
George P. Shultz, Secy. of State, Reagan Administration, 1982-1989
Kevin Hassett, Director, Economic Policy Studies, American Enterprise
Institute
Arthur Laffer, member of President Reagans Economic Policy Advisory
Board, 1981-1989
Gregory Mankiw, Chairman, CEA, Bush II Administration, 2003-2005
Douglas Holtz-Eakin, Senior Staff Economist, CEA, Bush I Administration,
1988-1989; Director, CBO, 2003-2005; senior economic policy advisor,
John McCain presidential campaign, 2007-2008
R. Glenn Hubbard, Chairman, CEA, Bush II, 2001-2003
Eli Lehrer, President, R Street Institute
Andrew Moylan, Executive Director & Senior Fellow, R Street Institute



Their argument . . .
You cant beat something with nothing.
Conservatives need a serious climate policy or well become
politically irrelevant.
Conservatives complain about EPA regulations and high income tax
rates but have no plan to stop EPA or achieve real tax reform.
A carbon tax is the solution. It taxes bads (emissions), not goods
(capital, labor). It doesnt pick winners and losers but lets the free
market decide.
While making us credible on climate change, championing carbon
taxes will give us leverage to rein in EPA and cut income, corporate,
capital gains, and/or social security taxes.
This aint pie-in-the-sky. British Columbia shows it can be done!
Fundamental Error
Carbon taxers confuse not supporting a compromising,
inside-the-beltway deal with not having a plan.
Our plan is to make the moral, economic, and scientific
case for unleashing what technology analyst Mark Mills
calls the North American energy colossus. AND . . .
Work to throw the bums out in 2014 and 2016 so
national policy facilitates rather than obstructs
Americas market-driven energy renaissance.
Carbon taxers unstated assumption: full-throated
conservative victory is impossible, maybe even
undesirable. Siren song of defeatism.
You cant beat something with nothing!
Many of the same pundits who push a carbon tax today did so
during the debates on the Kyoto Procotol and the Waxman-Markey
bill.
Cap-and-trade was inevitable unless Republicans endorsed a
carbon tax, they argued, because you cant beat something with
nothing. Wrong!
Cap-and-trade died in the November 2010 elections, because
conservatives opposed it as cap-n-tax a disguised tax on energy.
And skeptics challenged climate alarm.
Rather than learn the obvious lesson we can rally Americans to
our cause if we champion affordable energy and climate realism
R Street et al. ask conservatives to do openly what Obama and the
Democrats, fearing voter retribution, tried to do by stealth.


Carbon taxers are behind the times. Voters are not
clamoring for carbon regulation, because the alleged
climate crisis isnt happening.
In the 21st Century, Atlantic
Ocean circulation collapse is
very unlikely, collapse of the
great ice sheets is
exceptionally unlikely, and
catastrophic release of
methane from melting
permafrost is very unlikely.
IPCC AR5, Chapter 12
Voters care much more about jobs and economic opportunity. States
where energy production is growing (Texas, Wyoming, North Dakota,
Colorado, Utah, West Virginia) are among those with the fastest GDP growth.
Conflicted and Confused
Conservative carbon taxers want to put pedal to the
metal & slam on the brakes at the same time.
They profess to support fracking, Keystone XL Pipeline,
even coal mining.
But the core premise of a carbon tax is: fossil fuels are
destroying the planet and should be suppressed.
If you tax a thing, you get less of it: Econ 101.
A house divided against itself cannot stand.
Conservative leaders cant promote carbon taxes
without dividing the movement and demoralizing its
base.
Carbon tax: Serious climate policy?
Using EPA climate sensitivity assumptions, Cato Institute
climatologist Chip Knappenberger calculates that even if the
U.S. economy were to shut down tomorrow, the net impact
would be a reduction in global temperatures of approximately
0.17C by 2100 an amount that is for all intents and
purposes, negligible.
A politically-feasible carbon tax would achieve even less -- a
costly exercise in futility.
If climate change is a serious problem, the only real solution is
technological breakthroughs that make non-emitting energy
cheaper than carbon energy. Zero-emission energy will scale
up rapidly only when it makes people richer.
Taxing away carbon energy before commercially-viable
substitutes are available is economically-harmful and
therefore politically unsustainable.

Carbon Tax Pipe Dreams
Revenue Neutral?
Congresss big spenders and deficit hawks (often
the same people) have no interest in tax reform
that does not enhance revenues.
That was the real attraction of cap-n-tax. CEI FOIA
found Obama Treasury expected Waxman-
Markey to generate up to $400 billion in new
annual revenue.
David Kreutzer: It is delusional to believe that
$200 billion in new revenues could walk across
town [in Washington, D.C.] without being
molested.


Carbon taxes are regressive, therefore . . .
(3) Carbon taxes cant be implemented
without significant revenues used for
welfare rather than to reduce other taxes.
(1) Fuel poverty: On average, U.S.
households earning <$50,000/yr spend
more on energy than on food, medicine,
clothing, insurance, or healthcare.
(2) Many low income households
already must choose between heating
and eating, keeping cool or paying The
rent, etc.
(4) If conservatives insist on revenue-
neutrality cutting e.g. cap gains
taxes while increasing the cost of gas
& utilities for the poor -- they will be
pilloried (this time, justly) for seeking
to benefit the rich at the expense of
the poor and middle class.

(5) BUT: If even $1.00 of the revenues go for
anything except offsetting tax cuts, conservatives
who support the carbon tax will violate the
Taxpayer Protection Pledge.
Even if possible, a revenue-neutral carbon tax would
harm the economy
The smaller the base on which a tax of a given size is levied,
the more it distorts market signals.
Imagine if 10% of U.S. personal income taxes were replaced
with a targeted tax on automakers, farmers, or software
developers.
There would be a depression in the targeted sector, which
would then have adverse multiplier effects on other
industries.
The base of a carbon tax particular commodities and
industries (coal, power generation) is narrower than the
base for retail sales, income, and labor taxes.
Substituting carbon taxes for income taxes would make the
tax system less efficient.
It taxes bads not goods?
A carbon tax is an activity tax, not a consumption
tax.
Its a tax on carbon-based (fossil) fuels, which
supply 82% of U.S. commercial energy.
Energy, like land, labor and capital, is a factor of
production.
Without carbon-based energy, few of us would be
employed or even exist.
A carbon tax is an indirect tax on labor and
production on goods.
Carbon tax: monster that eats its own tail
A carbon tax aims to de-carbonize the economy.
By design, it taxes away the base on which it is levied.
The more CO2 emissions decline, the more the tax
must be raised to generate the same revenue.
The higher the tax gets, the more we must rely on
costly, intermittent, under-performing energy sources
(wind turbines, solar panels, biofuels) that are not up to
the task of powering a modern economy.
A carbon tax doesnt pick
winners and losers?
A carbon tax discriminates against carbon-based (fossil) fuels.
Thats its core function! Just because the market sorts out the
effects of a discriminatory tax does not make the tax non-
discriminatory.
Like green energy mandates and subsidies for Solyndra,
carbon taxes rig energy markets but throughout the
economy.
Retail intervention bad, wholesale intervention good thats
carbon taxers free market philosophy.
Like cap-and-trade, the purpose of a carbon tax is to finally
make renewable energy the profitable kind of energy in
America (President Obama). Its to drive investment
decisions towards clean energy (former DOE Secy. Steven
Chu).
A carbon tax is all about picking winners and losers.

EPA Rollback?
Neither Waxman-Whitehouse nor Sanders-Boxer would remove
one iota of EPAs authority or preempt any state GHG regulation.
It [a carbon tax] would be the best legislative option. But I
wouldnt want it to replace the other actions that, say, the EPA
could take. Rep. Henry Waxman, Feb. 1, 2013
If greens really wanted to replace command-and-control with
carbon pricing, Waxman-Markey would have repealed regulations.
Instead, the bill contained hundreds pages of new regulations (e.g.
national green energy quota) before it even got to cap-and-trade.
Does anyone really believe Mass. v. EPA, the proliferation of state
renewable energy mandates, fuel economy standards, federal
energy efficiency standards, state electricity demand-reduction
programs, etc. were just a strategy to put conservatives over a
barrel so progressives could trade it all away for a carbon tax?

British Columbia: Model for the U.S.?
5 years after enactment,
Pembina Institute lobbied
to raise the tax from $30 to
$200 per ton and scrap
revenue neutrality.

Cost per household:
$1000/yr in higher natural
gas bills.

Christy Clark won Premier
race in part by promising to
freeze carbon tax for
another five years.
Less than 6% of BC electricity comes from fossil fuels!
Political Big Picture:
A movement that is pro-tax and anti-energy competes for hearts and
minds with a movement that is pro-energy and anti-tax.
Conservatives are truly the dumb party if we squander our tax and energy
advantage, and mangle the product differentiation that gives voters a
reason to support conservative politicians!