Sens. Sheldon Whitehouse, D-R.I., and Brian Schatz, D-Hawaii, are serious about tackling the challenge of climate change and they’re out this year with another carbon proposal intended to be an “olive limb” to the right. As Whitehouse describes it:

Virtually every person on the Republican side who has thought the climate change problem through to a solution has come to the same place: price carbon emissions to encourage cleaner energy and return the revenue the American people.

That’s just what their new legislation intends to do. From 10,000 feet, it’s a promising start. The proposal imposes a tax on carbon emissions from fossil-fuel combustion and other major emitters; establishes a border adjustment to address concerns about competitiveness; and returns all the revenue, keeping none for the federal coffers.

The devil, however, is in the details. And that’s where the American Opportunity Climate Fee Act falls short.

First, there’s the revenues. We know from the literature that a revenue-neutral carbon price can boost economic growth, if revenues are devoted to cutting taxes to capital. Other ways of recycling the revenue—cutting payroll taxes, offering lump-sum rebates or reducing sales taxes—all pull the reins in on the economy. The Whitehouse-Schatz proposal spends the revenue several ways: reduces the top corporate income tax rate to 29 percent; offers a refundable tax credit to working Americans; offers additional payments to Social Security and veterans’ benefits recipients; and delivers $10 billion in annual block grants to the states.

The cuts to the corporate income tax rate are a good start, but insufficient. Any redesign of the corporate income tax should make the United States a more competitive place to do business; the Whitehouse-Schatz proposal would leave the United States with a tax rate that’s still 50 percent higher than the European average. That’s not exactly the ground-breaking shift we’re looking for.

Refundable tax credits to workers and additional payments to Social Security and veterans’ benefits recipients are intended to address the regressivity of a new tax on carbon. That’s a worthy goal; reducing greenhouse gas emissions shouldn’t increase the burden on those least able to pay. But the senators’ proposed structure creates a national constituency for something akin to a new entitlement. That constituency will support a tax just high enough to maintain annual payments and just low enough to not actually phase down the greenhouse gas emissions that support the new annual payment.

Lastly, the $10 billion in block grants is intended to fund individual states’ efforts to help those who can least afford to pay the new taxes on energy, or those whose industries are hardest hit, distributed on a per-capita basis. That creates a serious issue for the most rural states with the lowest populations – Alaska, the Dakotas, Montana and Wyoming. These states would also be disproportionately impacted; energy development is among the top five industries in Alaska, North Dakota and Wyoming.

Then there’s the matter of the tax itself. Whitehouse-Schatz would start at $49/ton of carbon dioxide in 2018, rising 2 percent above inflation year-over-year until an emissions target is attained. That’s a pretty high starting value: when the Congressional Budget Office modeled the Waxman-Markey cap-and-trade proposal in 2009, it estimated first year prices around $15/ton.

More troubling, however, is how the tax is applied. The good news: it’s designed to be administratively simple, capturing emissions at as few possible collection points and as accurately as possible. The bad news: in capitulating to environmentalists’ demands, it actually discourages industry best practices and safe and clean infrastructure. Whitehouse-Schatz requires that the tax be applied to, “greenhouse gases that escape throughout the fossil fuel supply chains.” It would not be applied at the points of emission, but rather an adjustment to the tax would applied equally to all producers and importers of fuel. Companies who utilize the best practices and the most advanced infrastructure with the fewest leaks will pay just as stiff a penalty as companies that wisely avoid investing in equipment from which they won’t benefit.

Finally, the Whitehouse-Schatz proposal doesn’t include any mechanism for regulatory preemption. The Environmental Protection Agency is obligated to regulate greenhouse gas emissions under the Clean Air Act, a mandate that created the faulty, expensive and ineffective Clean Power Plan. No tool within the CAA creates a proper framework for a regulatory solution. Even the Waxman-Markey cap-and-trade bill included provisions that would prevent the EPA from regulating carbon under certain provisions in the Clean Air Act. The senators, however, see this regulatory burden as a bargaining chip, not a problem to remedy.

For all its faults, the Whitehouse-Schatz proposal is promising in one respect: it demonstrates that motivated environmentalists know that market-based instruments can address the climate challenge effectively. An appropriately designed revenue-neutral carbon price can encourage economic growth, draw investment, boost innovation and achieve more emissions reductions at a lower cost than the regulatory machine. Toward that end, R Street has proposed that a carbon tax that would finance the outright elimination of the corporate income tax, a proposal we believe will unleash capital markets and boost employment while untethering economic growth from a carbon-based fuel supply.

Sen. Whitehouse is right – conservative solutions can work. The American Opportunity Climate Fee Act, however, is a far cry from conservative.

Image by visualdestination

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