By Greg Ip
Having agreed to ambitious new targets for reducing emissions of greenhouse gases in Paris, the world’s nations now need a way to hit those targets.
There’s no dispute among economists on the most cost-effective way to do that: a carbon tax. President Barack Obama agrees. In Paris he called such a tax “the most elegant way” to incentivize investment in, and consumer demand for, cleaner energy technology.
But that sentiment is at odds with Mr. Obama’s own record. He has never formally proposed a carbon tax or even an increase in the gasoline tax. The message isn’t that a carbon tax is impossible, but that Mr. Obama is not the person to deliver it. Crafting a carbon tax acceptable to business and to those Republicans who want to address climate change would probably require trade-offs that Mr. Obama couldn’t swallow, such as using the money to finance corporate tax cuts instead of new spending or deficit reduction, and rolling back regulations on greenhouse gases.
The political radioactivity of carbon taxes dates to 1993 when President Bill Clintonproposed a “BTU” tax based on the heat content of fuel. That tax died as farmers, manufacturers and others pressed for exemptions and legislators on both sides of the aisle complained of the hit to the middle class.
Mr. Obama campaigned on a pledge to not raise taxes on any family earning less than $250,000 a year, which made it difficult, politically, to propose a carbon tax or higher gas tax. Instead, he and Democrats in Congress went with selling tradable permits to emit greenhouse gases—an approach, known as cap and trade, that is economically similar to a tax. Nonetheless, it died in 2010 amid opposition by most Republicans, who called it “cap and tax,” and some Democrats in Congress.
Since then, Mr. Obama has instead turned to regulations, such as boosting required fuel efficiency of cars and a Clean Power Plan that compels states to limit power-plant emissions (they can use cap and trade to do that). At the same time Congress continues to shower billions of dollars of tax credits on renewable energy.
These are expensive ways to combat climate change. Mandated energy efficiency limits consumer choice and makes cars and appliances more expensive. Plunging gasoline prices have sent consumers flocking to less efficient light trucks, and auto makers are pressing to relax the fuel-efficiency standards when they come up for review in 2017. Subsidies create industries addicted to taxpayer support. Regulations also provide less certainty than legislation: two dozen states are suing to overturn the Clean Power Plan.
What are the odds a carbon tax will fare better under the next president? Only a few Republican candidates for president say climate change needs to be addressed, and none have made it a priority. That could change if one actually became president. Jerry Taylor,president of the Niskanen Center, a libertarian think tank that backs a carbon tax, notes Republican voters are more concerned than their candidates about climate change. One poll found a slim majority believe there’s “solid evidence” of global warming.
While Hillary Clinton, the Democratic front-runner, promises more action on climate change, she has not embraced a carbon tax, while Vermont Sen. Bernie Sanders has and former Maryland governor Martin O’Malley is open to the idea.
But any president who wants to enact a carbon tax will almost certainly have to make it palatable to business and some Republicans.
For example, Mr. Clinton wanted to use the BTU tax to reduce the deficit while Mr. Obama originally earmarked the money from selling trading permits for worker tax credits and green-energy subsidies. To win over conservatives, a carbon tax would probably have to be “revenue neutral,” that is, used to reduce other taxes, as with the Canadian province of British Columbia’s carbon tax.
George Frampton, an environmental adviser to Mr. Clinton, and Walter Minnick, a former Democratic congressman, are drumming up support for a carbon tax, half of whose revenue would be used to offset the effect on lower- and middle-income taxpayers and the other half to cut corporate tax rates, a longstanding priority of both Republicans and business. Mr. Frampton says the most promising way to create bipartisan support for the tax is to tie it to tax reform. By boosting investment, lower corporate tax rates could make the package, on net, neutral or even positive for growth.
Their proposal would collect the tax using existing federal infrastructure to collect fees, taxes and data on coal, refined oil and natural gas. A tariff on carbon-intensive imports would neutralize concerns about competitiveness.
Mr. Obama’s regulations weaken the incentive for Democrats to compromise (since they leave less for a carbon tax to accomplish) but for Republicans and business, the opposite is true. For them, the power plan “represents an endless series of regulations from an agency they hate,” says Mr. Taylor.
Yet in the wake of the Paris climate accord, further action on climate change looks inevitable. The question, he says, is “whether we address it using markets or using regulators.”