Clinton’s Stealth BTU Tax

The centerpiece of President Bill Clinton's first budget proposal was a massive energy tax. The tax on BTUs (or "British Thermal Units") was estimated to cost approximately $30 billion per year, or over $300 per family of four. Some economists predicted that it would eliminate over one-half million jobs. Had it been enacted, Clinton's BTU tax would have made it more expensive to heat a home, cook a meal and drive to work. Such a proposal hardly fit the Clinton ideal of "putting people first."

Of course the energy tax was not just about raising money for federal coffers. It was designed to help save the planet too. "We support the energy tax not simply as a revenue raiser, and not even primarily as a revenue raiser," explained then-Council of Economic Advisors Chairman Laura D'Andrea Tyson. "It is primarily an energy conservation measure," she said. Vice President Al Gore proclaimed that the energy tax "reduces pollution, promotes energy efficiency, and helps us become more independent from foreign oil." Environmental activists cheered the President's bold move and lined up to support the measure, despite its massive cost.

Given its onerous impact, it should be no surprise that the BTU tax was a political nonstarter. Within days of Clinton's announcement, Senators from both parties made it clear that they would not support such a tax. The White House was forced to settle for a 4.3 cent tax on gasoline and other transportation fuels — far below what many administration officials, including Gore, reportedly wanted. In fact, many administration officials simply believe that taxing energy is the right thing to do. "We should be looking at taxing the things we do not want to have happen: pollution and excessive use of energy," said Alice Rivlin, Clinton's former budget director who now sits on the Federal Reserve Board. Before her appointment, Rivlin advocated a one-dollar hike in the gas tax.

Energy tax proponents may get a second chance. This year, on July 17, Undersecretary of State Tim Wirth pledged that the United States would lead the charge toward "verifiable and binding" emission reductions in order to prevent global warming caused by human emissions of greenhouse gases. Reducing greenhouse gas emissions requires, in particular, cuts in carbon dioxide emissions. This, in turn, entails reducing the consumption of energy. Speaking in Geneva, Wirth said the world must "take urgent action" or face the possibility of environmental armageddon.

While a controversy continues to rage over the reliability of global climate predictions, Wirth is insistent that the time to act is now. This should be no surprise, for Wirth has advocated dramatic action to avert global warming for quite some time. In 1988, he said that "What we've got to do in energy conservation is to try to ride the global warming issue. Even if the theory of global warming is wrong, to have approached global warming as if it is real means energy conservation, so we will be doing the right thing anyway in terms of economic policy and environmental policy." Though Wirth cited recent scientific developments as the reason for this year's policy change, it is clear that science is not the basis for Wirth's insistence on reducing emissions of greenhouse gases.

Greenhouse gas emission reductions will not happen by themselves. They will have to be forced. An energy tax — possibly in the form of a tax on the carbon content of fossil fuels — is a favored method. Thus, without saying it, Wirth signaled that a new energy tax proposal will be on the table in a second Clinton term.

Many economists argue that an energy tax would be the most economically efficient means of reducing greenhouse gas emissions in the United States, particularly when compared to regulatory alternatives such as automotive fuel economy standards. Yet that does not mean energy taxes are cheap. Far from it.

Stabilizing greenhouse gas emissions at 1990 levels over the next fifteen years — a modest first step according to most global warming alarmists — would require a tax of more than $100 per metric ton of carbon, or its equivalent. Industry economists estimate that such a tax would cost approximately $200 billion per year, or well over $2,000 per household. Reducing emissions by an additional 20 percent, as proposed by Germany, could more than double the costs of stabilization, says Gary Yohe, an economist at Wesleyan University. Even were the taxes offset by corresponding cuts in income taxes, the new levy would crimp economic growth. Yohe suggests that the imposition of energy taxes on this scale would feel like the energy crisis all over again.

Industry would take a pounding. Energy intensive sectors of the economy, including mining, chemical production, and paper, would be particularly hard hit. This has some labor unions, such as the United Mine Workers, worried. "We're looking at 10,000 jobs lost and the extinction of the UMW," the union's Eugene Trisko told The Washington Post.

Yet the burdens on industry are only the tip of the iceberg. An energy tax would raise the price of heating a family home, going to work, visiting family and friends, and buying groceries. In short, an energy tax would impact everything.

Of course energy taxes are not the only option. Similar reductions in greenhouse gas emissions could be achieved through a 1970s-style rationing system. Such an approach might even incorporate tradable emission permits. Imposing quotas on utilities and fuel suppliers could reduce emissions without directly taxing consumers. Yet the effect on energy prices would be the same.

Must global warming policies be so costly? Environmental groups once claimed that energy conservation and a shift to alternative energy sources (wind, hydro, etc.) could generate emission reductions at minimal cost. Some even said that stopping global warming could generate a profit! But few still inhabit that fantasy land.

Universal adoption of off-the-shelf conservation technologies might generate some savings, but not much. If energy conservation is so wonderfully profitable, there is no need to cry "global warming" at a crowded international conference to get conservation measures adopted. In fact, environmental lobbyists should be able to quit their jobs, start energy consulting businesses, receive royalties from their clients' cost savings, and finance environmental activism. Of course, that would mean that conservation investments would have to compete in the real marketplace. Energy conservation can only go so far. Ultimately, there is no getting around the fact that "verifiable and binding" emission reductions will impose significant costs, economic and otherwise.

Senate Democrats do not appear any more enthusiastic about an energy tax now than they did when Clinton first proposed one in 1993. On July 17, six Democratic Senators sent a letter to the President holding that "it is premature for the United States to agree" to binding emission reduction targets because such a policy would result in "significant economic penalties and dislocations (e.g. job losses, reduced international competitiveness and diminished economic productivity)."

The Clinton Administration disavows any effort to hamstring the U.S. economy or, indeed, to impose any policy that might hurt someone, somewhere, at some time. At a recent Senate hearing, Wirth pledged that "We would not… agree to anything that would disadvantage our industry and disadvantage our economic situation." Then again, they probably said the same thing about their energy tax in 1993.

–Jonathan H. Adler Contact Jonathan Adler at [email protected]