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The Three Major Problems with a Carbon Tax


It faces both political and practical obstacles.

When it comes to energy policy, Washington has one resource that appears infinitely renewable: carbon-tax proposals.

Al Gore proposed a carbon tax back in 1992. The Clinton administration tried, and failed, to impose a “Btu” tax on all forms of energy. The latest iteration of the carbon tax is the “carbon dividend” plan, which was endorsed last month by a group of Nobel-winning economists, chairs of the Federal Reserve, and two former Treasury secretaries.

Proponents claim that a carbon tax would be the most cost-effective way to cut carbon-dioxide emissions. But the carbon tax keeps running aground. There are three big problems with the concept: It would disproportionately hurt low-income consumers, it would inevitably be watered down by special interests, and it would have to be imposed on our trading partners.

The regressive effects are well known. Even if, as many proponents suggest, the proceeds of the tax were paid out to consumers on a quarterly basis rather than being used to fund the government, having to wait months to recover the extra money they’ve spent could cause financial stress for poor and working-class families.

A 2012 study by scholars from the Brookings Institution and the American Enterprise Institute found that the carbon-tax burden “would comprise 3.5 percent of the income of the poorest decile of households and only 0.6 percent of the income of the highest decile.” For low-income workers, particularly those living paycheck to paycheck, such a tax — which would mean higher prices for nearly everything — would impose a major burden. Higher energy prices would be particularly burdensome, and the payments less likely to fully cover the costs, for workers and tradesmen who live in rural areas and must drive long distances to get to and from their job sites.

Second, a carbon tax would be targeted by armies of lobbyists, with some aiming to kill it and others aiming to get a dispensation. In 1993, the Washington Post reported that the Clinton administration was abandoning the Btu tax because it had underestimated “the opposition the tax would face from manufacturers, farmers and the energy industry.” Last November, voters in Washington State defeated a carbon-tax proposal known as Initiative 1631 by a wide margin. That tax would have exempted aviation and maritime fuel, as well as “energy intensive, trade-dependent” businesses such as steel plants, aluminum producers, and pulp and paper mills.

The stickiest problem with the carbon tax is the problem of “border carbon adjustments,” which is another name for the tariffs that would be imposed on imported goods and services. Such tariffs will be needed, supporters say, to prevent “carbon leakage” (i.e., carbon-intensive manufacturing moving overseas) and “enhance the competitiveness of American firms that are more energy-efficient than their global competitors.” That border adjustment would require calculating the greenhouse-gas footprint of nearly every single thing we import. Imagine what it might mean for a big manufacturer like Boeing, which produces airplanes with parts that are manufactured and imported from multiple countries. Some of those parts are themselves made from parts and commodities imported from still other countries. Keeping track of all of those carbon flows, and avoiding constant disputes over the accuracy of the data, will be an accounting nightmare.

In addition to determining the right level of tariff, a carbon tax must overcome the “free-rider” problem. William Nordhaus, an economics professor at Yale University who won the Nobel Prize in economics last year for his work on climate-change policy, is a long-time advocate for a carbon tax. Nordhaus has underscored the “importance of near-universal participation in programs to reduce greenhouse gases.” In 2007, he estimated that if only half of the world’s countries agreed to participate in a carbon-tax effort, there would be an “abatement cost penalty of 250 percent.” In other words, the countries that have imposed the carbon tax will have to more than double their carbon-tax rates in order to compensate for the free-riding countries.

Moreover, rich and poor countries alike have consistently prioritized economic growth over substantive action on climate change. University of Colorado professor and author Roger Pielke Jr. has dubbed this the Iron Law of Climate Policy: “When policies on emissions reductions collide with policies focused on economic growth, economic growth will win out every time.” It will be especially difficult for the U.S. to get poorer countries to jump on the carbon-tax bandwagon, seeing as the average American uses five times as much electricity as the average Brazilian, ten times as much as the average Iraqi, and 16 times as much as the average Indian.

The history of international efforts to ban land mines shows how difficult it will be to impose a worldwide carbon tax. Land mines are ghastly weapons that seldom hit their intended targets. Nearly 90 percent of the people who are killed or maimed by them are civilians. All around the world, large swaths of usable land have been declared off limits to farming and human use owing to the danger of abandoned, unexploded land mines.

The effort to ban land mines has garnered widespread support. According to the International Campaign to Ban Land Mines, 164 countries have signed the Mine Ban Treaty, which was first adopted in 1997, the same year that the Kyoto Protocol was signed. But just as the Kyoto Protocol hasn’t had much success in limiting greenhouse-gas emissions, 32 countries still haven’t signed the mine-ban treaty, including the United States, China, India, and Russia. Thus, despite universal agreement on the awfulness of land mines, and decades of concerted effort, there is still no worldwide agreement to ban them.

If we can’t get an agreement to ban land mines, how will we ever get an enforceable international agreement to tax coal, oil, and natural gas, which together currently provide 85 percent of the world’s energy?

Proponents claim carbon taxes are essential in the fight against climate change. That may be true. But my guess is that we will see a universal agreement to ban land mines before we see a substantial levy imposed on the fuels that drive the global economy.

ROBERT BRYCE — Robert Bryce is a senior fellow at the Manhattan Institute and the author and producer of the forthcoming book and documentary Juice: How Electricity Explains the World.