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A Carbon Tax Would be a Costly Failure

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Recently, some Republicans have developed the rather unfortunate habit of floating tax increases shortly after cutting taxes. The Tax Cuts and Jobs Act, signed into law in December 2017, reduced taxes on more than 90 percent of households and gave the average family of four a $2,000 boost just in time for Christmas. But then, mumblings over tax increases began. As the Competitive Enterprise Institute and the Taxpayers Protection Alliance have pointed out, the administration’s recently enacted tariffs, which is nothing more than an import tax, will likely cost millions of jobs and raise prices on everything from foodstuffs to new homes.

As if that were not enough, Rep. Carlos Curbelo, R-Fla., recently introduced a bill that would establish a $23 per-ton carbon tax on oil refineries, gas processing plants, and coal mine mouths beginning in 2020. E&E News reports that, “Industrial sectors such as cement, aluminum, steel and glass would also pay the fee for emissions stemming from physical or chemical reactions outside of energy production.” While the legislation eliminates the federal gasoline tax, the net impact of such a steep carbon tax would be disastrous for working families. Despite dubious claims that carbon taxes can avert climate change and promote “renewables,” this misguided policy will only succeed in fleecing Americans struggling to keep the lights on.

Trying to figure out how much more working families will have to pay under the proposed carbon tax is a tricky exercise, since previous estimates covered different proposals. But virtually all studies analyzing carbon tax proposals have come to the same conclusions: Fiscal impacts are significant and disproportionately harm low-income households. In 2010, researchers from the University of Wisconsin and Stanford University found that a $15-per-ton tax on carbon results in the poorest one-fifth of households paying $325 extra a year for gas and electricity. In paying the tax, “the burden as a percent of annual income is much higher among lower income groups than higher income groups.”

In a 2013 review of the evidence, Brookings Institution scholars William G. Gale, Samuel Brown, and Fernando Saltie concurred that carbon taxes will almost certainly fall upon low-income folks rather than their wealthier counterparts, with virtually all estimates ranging in hundreds of dollars annually.

It makes no sense to craft a policy that will increase energy bills on millions of vulnerable Americans. But, to “green” advocates, the answer is seemingly simple: Getting America off of carbon will clear the air and avert a catastrophic change in climate. While it’s impossible to sum up decades of climatology research in a few paragraphs, the case for a carbon tax is flimsy even if we assume that carbon impacts climate. As it turns out, the economy is complex and impossible to steer toward a narrow, preordained outcome dreamed up by bureaucrats.

As left-leaning economist Hans-Werner Sinn points out, energy producers would likely respond to an impending carbon tax by increasing supplies in the here-and-now, crashing the price and encouraging more carbon emissions in the present. Whoops!

This idea, known as the “Green Paradox,” is true if oil and gas companies are flexible enough to change their output quickly in response to changing policies. Wrongly assuming the opposite(that energy suppliers aren’t as adaptable as Sinn predicts) implies that gas prices will likely rise in coming decades due to exploding demand across the globe. If energy suppliers prove inflexible in meeting this increased demand, they’ll go out of business with or without a carbon tax.

All of these hypotheticals lead to a sobering conclusion: Economic realities will likely doom a carbon tax to fail. Economies are complex instruments that always defy central planners, derailing even the best-laid plans. Policymakers must steer clear of this poorly thought out proposal that will achieve little at a gargantuan cost.

Lawmakers can preserve the legacy of tax reform by avoiding expensive schemes to engineer ecology. Republicans who passed historic tax reform would be wise to avoid passing a tax increase that could wipe out any savings from the tax reform.

Co-authored with Ross Marchand and originally published at The Washington Examiner.