Carbon Tax Idea Takes Hold in Heartland. Great Minds thinking Alike? or Emerging Strategery?
January 31, 2013
During a short trip to DC early this week, I had the chance to interview Chris Mooney, above, on how Washington is processing President Obama’s sudden change in tone on climate change.
Meanwhile, the basic idea of setting a price on carbon has been steadily working its way into the mainstream conversation…almost like there was some kind of over-arching communication strategy….
The White House has ruled out proposing a carbon tax.
Mooney points out that the president has a lot of levers to pull short of pricing carbon.
Three dimensional chess masters, assemble.
If Congress and the president were more rational than political — admittedly, a very big if — they could kill a covey of birds with one stone. They could replace the payroll tax with a carbon tax.
Suddenly, Social Security and Medicare funding would be secure, which means the rest of the fiscal crisis would be fixed. Plus, you might save the planet in the process.
Instead of paying combined Social Security and Medicare taxes of 7.65 percent through payroll deduction, workers would keep that money.
They’d need at least part of it to pay for the carbon taxes on gasoline, natural gas and electricity produced by coal or gas plants. For example, if oil companies were taxed $20 a ton for the carbon dioxide their products created, they’d pass along the cost to consumers. The price of gasoline would go up about 20 cents a gallon.
Consumers, eager to save money, would look for ways to reduce their carbon use. Entrepreneurs, eager for ways to cash in, would look for ways to help them. Instead of a regressive flat tax on payroll, the carbon tax would be more efficient consumption tax.
Slowly, perhaps imperceptibly at first, carbon emissions into the atmosphere would be reduced. The temperature of the atmosphere would not go up so fast, perhaps stabilizing enough to avoid worldwide catastrophe. The Earth might be habitable for our grandchildren.
Liberal economists like the carbon tax. Conservative economists like the carbon tax. Environmentalists like the carbon tax. So why not do a carbon tax instead of fooling around with spending cuts, tax expenditures, payroll taxes, plan Bs, sequestration and all the rest of the fiscal cliff discussion?
The president, in his first term, was not idle. Fuel-efficiency standards are mandated to rise to 54 miles per gallon by 2025, the Environmental Protection Agency is now applying the Clean Air Act to carbon dioxide, and nearly $100 billion in stimulus funds went toward development of clean energy.
But much more is required, and Congress must be on board if the country is to meet Obama’s modest 2020 target for reducing carbon emissions by 17 percent, and 80 percent by 2050. For that to happen a carbon tax is vital.
It is also essential that the United States assume a leadership role in reviving international climate talks aimed at a global strategy for arresting the rise in carbon dioxide levels that, if unchecked, will overwhelm future generations.
With his call to action, the president has taken an encouraging step that will require many more from him and from all Americans. There is, quite literally, no time to waste.
Americans now will be focused on his State of the Union speech in mid-February, to see what kinds of policy changes and funding goals he might propose.
He tried and bombed on promoting a cap-and-trade measure in 2009.
The bill was designed to make businesses buy and sell permits to meet an overall goal of fewer emissions. But this complicated approach is too lenient on polluters and would take too long to work. Congress rejected it.
Instead, The Kansas City Star and some environmental groups favor imposition of a carbon tax or fee on fossil fuels, designed to encourage coal-fired plant operators to install more modern equipment.
But plenty of supporters – including some in the conservative ranks – say a carbon charge has a chance of being approved only if it’s revenue neutral. One of the proposed ideas is to return the funds raised by the tax or fee to Americans through reduced payroll taxes. It’s an interesting idea to pursue if Obama goes for a carbon tax approach.
Finally, Obama will have to be more creative in working with the rest of the globe, especially the fast-growing countries of India and China, to trim their manmade emissions.
Climate change is a worldwide problem begging for worldwide solutions. Still, America should take the lead to charge in that direction.
The record suggests that the world is more likely to approach the climate issue with a bundle of national policies, rather than a comprehensive, top-down climate pact. Decades of effort have resulted in a stagnant debate but a surprising amount of movement within many countries absent a mutually binding accord. Even China has advanced modest medium-term emissions targets, has negotiated directly with the United States on climate commitments and appears willing to tie promotion within Communist Party ranks to meeting stated environmental goals.
The problem is that this collection of policies is still small compared with the scale of emissions cuts scientists recommend. Much harder choices lie ahead for national leaders balancing short-term growth against long-term ecological concerns. One major reason for that is that the United States has not led. The nation is finally on a downward emissions trajectory, but the political debate gives little hope that the national commitment to long-term emissions cuts is durable. If we have reason to mistrust the Chinese on this, the Chinese have reason to mistrust us.
Passing national climate legislation would remove one of the most potent excuses the Chinese have not to do more. American diplomats such as Mr. Kerry would be able to apply pressure without remaining open to charges of American hypocrisy. Sticks as well as carrots would be available. If Congress enacted a carbon tax, lawmakers could include a border adjustment on imports from countries that lack comparable policy.
China’s growing emissions are a big problem. But they should not be another excuse for congressional inaction.
A carbon tax is a special kind of tax called a Pigovian tax, named after 20th-century British economist Arthur Pigou.
Normally, a competitive market produces just the right amount of a good. If there are not enough people selling glue, its price will rise and people will cash in by selling more glue. If too many people are selling glue, the price will go down, and some people will find it’s not worth their while to sell glue anymore. Either way, the market should settle at the point where the cost of producing more glue is equal to the value people place on that additional glue.
But Pigou realized that if a producer wasn’t paying for the full cost of producing a good, they would produce too much of it anyway and everyone else would foot the bill. Imagine that making glue is expensive because it costs a lot to cart away all the horse carcasses used in its production. There’s not going to be a lot of glue because only people who really like glue will be willing to pay to produce it.
Now imagine that instead of carting away the dead horses, glue factories realize they can dump them in nearby rivers for free. All of a sudden, it becomes a lot cheaper to make glue, so the price goes down. At a price like this, you can’t afford not to buy glue, so people consume more of it, and new glue factories pop up.
It all looks like economic growth, until the dead horses start piling up, and people start getting sick. Then they get a bunch of medical bills and the government has to spend money cleaning up the river. The sticky-fingered glue barons don’t mind much, because they can afford to buy the expensive houses upriver, and when the cost of cleanup gets spread to everyone, the cost to them is a pittance compared to their newfound glue fortunes.
Meanwhile, the tape users are fuming. They’re getting sick from glue they don’t even use, and the horse-dredgings are driving up their tax bill. And because a bunch of the former tape-makers have jumped on the glue bandwagon, there’s now a tape shortage. It’s a mess.
When you account for the costs of sickness and cleanup, each tub of glue costs $20 to produce. But the glue factories don’t pay for this, so they can sell glue at a going rate of $12. Glue that’s only worth $12 is being made at a cost of $20, so $8 is being wasted on each new tub of glue.
In this case, Pigou would prescribe an $8 tax on glue. Now, it costs glue factories $20 to produce glue, and only people willing to pay that much for glue will buy it. Less glue is produced, so fewer dead horses end up in the river, and the revenue raised from the tax can be used deal with the problems caused by the ones that do.
The dysfunctional glue market looks a lot like the current energy market.
Carbon, like the dead horses, creates what economists call a negative externality. A negative externality is the cost of an economic transaction that’s not borne by either the buyer or the seller, and is instead pushed onto society. It distorts markets and leads to inefficient outcomes, such as producing $12 worth of glue for $20.
A Pigovian tax corrects for a negative externality by making sure buyers and sellers pay the true cost of a good or service.