Why the carbon tax is an idea that won’t go away

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Using a carbon tax to fight climate change has long been a popular idea among economists, but November’s election results seemed to render carbon-tax advocacy something of a lost cause. Between the election of a president who has been aggressively skeptical about climate science and the defeat of a referendum on carbon taxes in Washington state, the political case against carbon taxes looked definitive.

And yet, carbon-tax proposals keep popping up, sometimes in the unlikeliest of places. Several weeks ago, The Washington Post reported the Trump administration was considering a carbon tax as part of its plan for corporate tax reform. Advocates of carbon pricing have also held high-level meetings with the White House, where they have at least received a respectful hearing.

Other parts of the administration have likewise shown renewed interest in the idea. The Federal Energy Regulatory Commission (FERC), which oversees the interstate transmission and sale of wholesale electricity, hosted a conference earlier this month focused on the problems state-level renewable energy programs posed for electric reliability. Though participants represented a broad range of industry, academics and policymakers, the conference reached a surprising consensus that replacing existing state energy mandates and subsidies with a carbon price would be an effective way to maintain reliability while meeting environmental goals.

Even at the state level, carbon taxes continue to be part of the discussion. In the state of Washington, Governor Jay Inslee has proposed a carbon tax as a way to fund education, and California is looking to revise its existing cap-and-trade program to make it function more like a carbon tax.

What gives? Why is an idea that, on the face of it, seems like a political nonstarter continues to be taken seriously by so many political actors?

Without question, part of what gives the idea of a carbon tax its staying power is the same thing that makes economists like it so much: it’s efficient. Regulatory mandates and subsidies tend to be a very expensive way to reduce emissions. A National Academy of Sciences report recently found that production and investment tax credits for wind and solar cost $250 for every ton of reduced carbon-dioxide emissions. That’s more than six times the Obama administration’s estimate for the cost of damage wrought by each ton of carbon emissions.

By contrast, a carbon fee would reduce emissions more cheaply because it lets people decide for themselves how best to reduce their emissions. If it costs me more to use carbon-intensive electricity, I might try to use more electricity from low-carbon sources, or I might try to use less energy altogether.

But the bigger reason the carbon tax has such staying power has nothing to do with environmental concerns. Rather, what’s attractive to policymakers about carbon taxes is that they provide sources of revenue that can be used for other ends. The Trump administration wouldn’t consider carbon taxes because they converted to climate activism. It’s because they need a new source of revenue to offset other changes they want to make to the tax code. Any method to offset lost corporate tax revenue is bound to be unpopular, but swapping carbon taxes for cuts to the corporate tax rate could bring along some Democrats and appeal to conservatives who want to shift the overall tax burden from income and capital to consumption.

Once the revenue side of the equation is considered, carbon taxes have the potential to appeal even to folks who are climate skeptics.

None of this is to say that a carbon tax is likely to be enacted in the short term. In today’s political environment, the safe bet is always on gridlock and inaction. But it does mean that carbon taxes will continue to be a part of the dialogue.


Image by Chuong Vu

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