Carbon Tax: Putting Price on Carbon March 2020, Daily Hampshire Gazette)
This column will ask you to imagine that you are the President of the United States and are about to receive a policy briefing. The Covid -19 crisis is upper most in our minds right now. However, critical issues like climate change can not be put on the back burner for ever.
Madam/Mr/Mx. President.
This briefing is about one method of fighting climate change, namely putting a price on carbon. We will refer to that price as a “tax”, although many carbon pricing advocates refer to it as a “fee”. The tax would be imposed on fossil fuels like coal and natural gas, and fluorinated greenhouse gases.
The purpose of a carbon tax would be to induce factories and power-generating plants to reduce carbon emissions by making those emissions financially costly. It could also accelerate efforts to develop lower emissions technologies and benefit companies that reduce their carbon emissions faster than their competitors.
There is an economic justification for these taxes. The true cost of burning carbon is not now being borne by the producer or user. Rather, society in general bears the cost through the consequences of climate change ( e.g. heat waves, flooding, droughts) and also air pollution. Currently, emitting carbon has no financial consequence for the emitter. Economists consider this an “externality.” Some people call this specific externality the Social Coast of Carbon (SCC)
Government action would have considerable public support, at least initially. Sixty-one percent of Americans think climate change is a problem that the government needs to address, including 43 percent of Republicans and 80 percent of Democrats, according to a survey from the Energy Policy Institute at the University of Chicago (EPIC) and The Associated Press-NORC Center for Public Affairs Research
One proposal currently under consideration in Congress is the Energy Innovation and Carbon Dividend Act ( EICDA), introduced by Rep. Ted Deutch (D-Fla.) and Rep. Francis Rooney (R-Fla.) It would levy what it calls a carbon “fee” beginning at $15 per ton, escalating by $10 annually, and reaching $115 a ton by 2030. The fee would be imposed at the first point of sale. An example would be when the producer of natural gas sells it to an electric power generating company. The EICDA projects that its provisions would reduce carbon emissions by 40% within twelve years. There would be annual reduction after that until about 90% reduction is achieved.
There are advocates for other carbon tax proposals , notably one authored by George Schultz and Jim Baker. It is endorsed by many economists, former Chairs of the Federal Reserve and prominent public figures. It is also endorsed by many large businesses including Goldman Sachs and Exxon, making it suspect to segments of the political left.
A carbon tax would be effective in reducing carbon emissions but it carries some heavy political baggage .
First, many economists believe that taxes have a “distortionary” effect that will adversely impact free-market decisions and reduce gross domestic product growth. There could also be “leakage” , such whereby businesses, and energy production, move overseas. Leakage may be significant if the tax is borne only by American based companies. Their products would be less competitive because they would be more expensive to produce.
Second,the legislative struggle will be complicated by competing priorities and plans. For example, an important part of both EICDA and Schultz-Baker is that all revenue from a national carbon tax, minus administrative costs, be distributed as a carbon dividend . This cash dividend would be distributed quarterly to adult American citizens and legal residents. However, there are also advocates for using funds generated by a carbon tax for used for research and development of technologies to fight climate change. That would conflict with distributing funds through a dividend. There is also significant interest in other approaches to climate legislation. This includes legislation to expand tax incentives for capturing carbon. There is also support for a tax on gasoline. It is possible that the dividend/technology/ tax incentive/gasoline tax plans would compete with each other, make passing a carbon tax more difficult.
Third, EICDA and similar plans also call for regulatory relief commensurate with the reduction in carbon emissions. The term “regulatory relief” may raise the hackles of Democrats just as the word “tax” may not sit well with Republicans,
Fourth, how will the carbon tax impact exports and imports? EICDA would impose a fee on imports based on the carbon content of their products. It would also give a rebate to exporters for carbon fees they paid for those products they sell to countries that don’t have comparable carbon pricing systems. Therefore, a carbon tax would involve international trade policy, a contentious issue in itself.
Fifth. Complicating matters further, the European Union is contemplating imposing a new tax on products from countries that aren’t working to reduce their emissions. You could us the word “tariff” instead of “tax” in that context. . Would US climate change policy have to meet European standards?
Sixth popular support for government action to fight climate change may weaken if a carbon tax hits people in their wallet. For example, a tax on energy generating plants using fossil fuel would probably lead to an increase in the cost of electricity. The EPIC/NORC survey asked people if they would be willing in pay a monthly fee on their electric bill to fight climate change. About 18 percent of consumers were willing to pay up to $100 per month more on their electric bill. However, about 50 percent were unwilling to pay even one dollar.
A carbon tax would also increase the cost of consumer goods by increasing the cost of manufacturing them. Will voters accept higher prices at the check-out counter now even if they are promised a dividend check later?
Madam/ Mr/ Mx. President, a carbon tax will address the Externality/SCC issue and would contribute significantly to fighting climate change. On the other hand, economic and political complications will make a carbon tax difficult to enact legislatively.
Gazette readers, if you were president would you make legislation like the Energy Innovation and Carbon Dividend Act a priority? If not, do you have a better idea?