Carbon Tax: Bad Politics, Bad Policy

Carbon taxes have been in the news of late. On July 10, former GOP Congressman Bob Inglis of South Carolina launched the Energy and Enterprise Initiative to promote a ‘revenue-neutral’ carbon tax as a Republican idea. On July 11, the American Enterprise Institute (AEI) hosted a hush-hush meeting of carbon tax advocates titled Price Carbon Campaign/Lame Duck Initiative. On July 13, former Reagan administration Secretary of State and Hoover Institution distinguished scholar George Schultz announced his support for carbon taxes.

For those who regard affordable energy as a blessing, the recent uptick in Republican advocacy for carbon taxes is troubling, especially because two of Gov. Romney’s top economic advisors, Greg Mankiw and Douglas Holtz-Eagan, are long-time proponents. For both political and policy reasons, GOP leaders should oppose carbon tax advocacy as dangerous folly.

The GOP has two main product differentiators going for it in electoral politics. The GOP supports spending cuts rather than tax increases to reduce the deficit. It also supports developing America’s abundant oil, gas, and coal resources to grow the economy, create jobs, and boost tax revenues. In contrast, many Democratic leaders want to raise taxes, restrict coal mining, ban construction of new coal-fired power plants, block the Keystone XL pipeline, and stifle the shale gas revolution.

For Republicans, both victory in November and a clear mandate for the next four years depend upon drawing a bright line between a GOP that is pro-energy and anti-tax and ‘progressive’ movement that is pro-tax and anti-energy. Advocating a massive new energy tax would blur the battle lines and demoralize the GOP’s Tea Party base.

Recall some recent history. Twenty-nine Democrats who voted for the Waxman-Markey cap-and-trade bill lost their seats in the 2010 elections. A key reason for this political “slaughter,” which helped the GOP regain control of the House, is that opponents exposed cap-and-trade as capntax – a stealth tax on energy. By what political calculus does the GOP now win elections by advocating an unvarnished energy tax?

Turning to policy considerations, proponents say we should tax ‘bads’ like pollution instead of ‘goods’ like capital or labor. Carbon dioxide (CO2) is a ‘bad,’ they contend, because its impact on global climate imposes a ‘social cost.’ But the social cost of carbon is very far from being a known quantity. Try, for example, to discern carbon’s social cost in the following information.

§ Global tropical cyclone frequency has declined slightly since 1970, while tropical accumulated cyclone energy (a measure of hurricane strength) has declined significantly since 2006.

§ As U.S. urban air temperatures increased over the past three decades, heat-related mortality and air pollution levels declined.

§ Since the 1920s, global deaths and death rates related to extreme weather declined by 93% and 98%, respectively.

Whatever your views on climate science, the claim that carbon taxes tax ‘bads’ rather than ‘goods’ is misleading. Enterprises don’t emit CO2 for the fun of it. They do so in the process of creating value and employing people. Carbon taxes are indirect taxes on labor and capital.

In a genuinely free society, taxes are used solely to raise revenue to pay for public services. That is, taxes are not used to regulate behavior, reward friends and punish enemies, or rig the marketplace. Carbon taxes deliberately aim to do those very things. Inevitably, the extent of the tax will be determined not only by fiscal considerations but also by social-engineering/wealth-transfer agendas and by sky’s-the-limit speculation about social cost.

Rep. Inglis says carbon taxes are a good idea even if one assumes global warming is “hooey,” because pricing carbon will reduce air pollution and improve energy security. But basing the social cost of carbon on air pollution risk also opens the door to excessive taxation, because air pollution alarmism is more pervasive and better entrenched than climate alarmism. For example, the EPA imputes scores of billions of dollars in annual health damages to fine particulate matter (PM2.5) at concentrations below the lowest levels associated with mortality risk in the epidemiological literature.

The energy security cost of oil consumption is another gauzy subject. Oil and government are joined at the hip in the Mideast, and some Mideast governments fund terrorist groups. But these generalities don’t enable us to calculate a ‘terror tax’ on oil. For starters, the vast majority of the oil we consume is not from the Mideast. Moreover, as Jerry Taylor and Peter Van Doren of the Cato Institute found, there is no discernible relationship between OPEC profits and incidents of Islamic terror.

Would the U.S. have as large a military presence in the Mideast if the region contained no oil? No. But protecting the Straits of Hormuz is a service our nation provides to the entire world. If anything, Gulf oil producers and oil-importing countries in Europe and Asia should pay to relieve the burden on U.S. taxpayers. Instead, carbon tax advocates would have U.S. citizens pay ‘twice’ – not only on April 15 but each time we purchase any good or service made with carbon-based fuels. That would place another drag on the economy. Economic stagnation is productive of malaise, not national security.

Inglis, Mankiw, and Holtz-Eakin favor a revenue-neutral carbon tax, with the proceeds used to reduce existing taxes on labor or capital. That has a certain appeal as a blackboard exercise, but the sausage factory is not kind to economic logic. One faction would clamor for a slice of the revenues to promote ‘clean energy.’ Another would demand a chunk to rebuild America’s aging roads and bridges. Still others would insist that a piece be used for deficit reduction. A panel at the AEI powwow featured presentations by “deficit hawks.” Of what value is a revenue-neutral tax to deficit hawks?

For the Obama administration, a big part of capntax’s appeal was its potential to raise $400 billion in additional annual federal revenues. This squeeze-the-taxpayer mentality would return with a vengeance in any serious debate about carbon taxes. Revenue neutrality is a pipe dream.

For economic liberty advocates, there are only two defensible reasons to consider carbon taxes. One is if we’re stuck with a choice between carbon taxes and cap-and-trade. Back in 2007-2010, some clever people argued that we had to support carbon taxes because “you can’t beat something with nothing.” They were wrong. We beat cap-and-trade by exposing it as a tax. Why on Earth should we support carbon taxes now, when cap-and-trade is dead?

Some limited government advocates may be intrigued by the possibility of a grand bargain in which a national carbon tax replaces all federal and State anti-carbon regulatory programs. Those include not only the EPA’s greenhouse gas regulations but also the Renewable Fuel Standard, sub-rosa carbon regulations like the Utility MACT Rule (which effectively bans the construction of new coal power plants), California’s EPA-awarded power to meddle in fuel-economy regulation, California’s cap-and-trade program and low-carbon fuel standard, RGGI, and State renewable portfolio standards (RPS).

That the EPA, California, and major environmental organizations would agree to such a bargain is unthinkable. They have spent 40 years fighting for the regulatory mandates they currently administer or influence, not for carbon taxes. The only deal they might accept is one in which they get carbon taxes and carve-outs for regulatory sacred cows. Republicans should eschew the politics of preemptive capitulation and keep their eye on the prize. The November elections could significantly change the correlation of forces in the nation’s capital, creating real opportunities to roll back the EPA’s greenhouse power grab without compromising the GOP’s bona fides on either taxes or energy.