Carbon Tax: Political Poison for Conservatives, Libertarians

[Editor note: This is a repost from Marlo Lewis, Jr.’s piece from last year, published at the CEI blogsite. It is particularly relevant given the increasing isolation of R Street and the Niskanen Center in the climate-change debate.]

“… it is untrue that conservatives have been trying to beat something with nothing. Our “something” is climate realism and an energy sector free to power a growing economy because government eschews all forms of market favoritism.”

“The 2016 elections have given conservatives and free marketers an unexpected and rare opportunity to help a bold president change the direction of national policy. We squander that opportunity if we instead legitimize the progressive movement’s anti-fossil fuel crusade and promote an economically-destructive tax that would actually grow government under the pretense of streamlining it.”

A carbon tax is political poison for conservatives and free marketers. The struggle for hearts and minds in this country is to no small degree a contest between a movement that is pro-energy and anti-tax and one that is pro-tax and anti-energy. This clear product differentiation is an immense advantage for conservatives. It is an asset motivating millions of people to support conservative candidates. If conservative leaders become advocates for a new tax on energy, they will divide their movement and demoralize its activist base.

Think about it this way. What if Donald Trump had campaigned for a carbon tax? His claim to be the champion of America’s coal miners, factory workers, and energy consumers would have rung hollow. He might well have lost in the primaries, and even if he won the nomination, he would have had less support in coal states, the Rust Belt, and rural America. In all likelihood, Hillary Clinton would be president today and the U.S. economy would still be under the shadow of the so-called Clean Power Plan and the Paris Climate Treaty.

President Obama’s regulatory climate policies, which President Trump is unwinding, were just implicit carbon taxes. So how can it be smart politics now for conservative leaders to stump for an explicit carbon tax?

Conservative policymakers should keep the following big picture points in view.

1. Affordable energy is vital to the growth and competitiveness of the U.S. economy. A carbon tax “works” by making the most plentiful and reliable energy sources more costly.
2. The power to tax involves the power to destroy. A carbon tax obviously has a unique potential to bankrupt the industries—coal, oil, and natural gas—that today supply 78 percent of all the energy Americans consume, and are projected to supply roughly the same share in 2040 (EIA, AEO2017, p. 10).
3. The initial level at which a carbon tax is set is less important than the associated long-term framework. As with the Clean Power Plan and Paris Agreement, what matters most is not the starting point but the trajectory. In both the leading Democratic and Republican proposals, the carbon tax ratchets up every year.
4. However rapid the initial schedule for increasing the carbon tax might turn out to be, two influential factions—the environmental movement’s Keep It in the Ground wing and Washington’s big spenders—will continually push to make the tax even more punitive.
5. A carbon tax is not a “serious” climate policy. Even a carbon tax steep enough to reduce all U.S. emissions to zero by 2050 would avert less than 0.2°C of warming by 2100. All the economic pain would be for little if any discernible environmental gain.
6. To address obvious competitiveness concerns, carbon tax proponents also advocate a system of border tariffs and rebates based on the relative carbon intensities of exports and imports. But given the international diversity of energy and climate policies and, more importantly, the supply-chain phenomenon—the fact that goods in trade increasingly embody inputs and value additions from several countries—it would require a new or expanded IRS to develop, administer, and audit compliance with the rules. Thus, a border adjustment system would vastly expand the scope of IRS-style regulation and intrusion. Conservatives think the current IRS is bad enough.
7. A revenue-neutral carbon tax is a pipe dream. Washington’s spendthrifts and deficit hawks—often the same individuals—have no interest in enacting new taxes that don’t “enhance” federal revenues.
8. Revenue neutral does not mean economically-harmless. The smaller the base on which a tax of a given size is levied, the worse the impacts on investment, competitiveness, and employment. For example, a $100 billion tax targeted on the film industry would promote far more capital flight and destroy many more jobs than a $100 billion tax spread across all income taxpayers, wage earners, or consumers. Using the proceeds from the film tax to send dividends to all households or cut corporate income taxes would not begin to ameliorate the economic damage. The base on which a carbon tax is levied—particular fossil fuel companies or products—is much narrower than the base for income taxes, FICA taxes, or sales taxes.
9. We are finally seeing a return to 3 percent growth because the market believes Trump will fight to protect rather than punish risk takers and job creators. Enactment of a carbon tax—a massive new tool of legal plunder—would create a whole new category of political risk, depress the market’s newly awakened animal spirits, and undermine investor confidence, derailing the economic turnaround.

A central tenet of the Niskanen Center’s advocacy of a carbon tax is that there is no plausible scenario by which “conservative political force” can undo the Environmental Protection Agency’s command-and-control climate regulations. The only way to rein in EPA, the Center told conservatives in 2015 and 2016, was to offer the greens something they want in return, namely, a carbon tax. In February 2016, the Center’s president opined that Trump would get “slaughtered” in the 2016 elections. The rest, as they say, is history. Trump beat Hillary Clinton, and the Trump administration is now working with Congress to undo much of what the Obama EPA did. The irony is that if Trump had bought into the Center’s defeatist pragmatism, he might not have won.

The so-called conservative case for a carbon tax is not new. Back in 2009, during the debate on the Waxman-Markey cap-and-trade plan, ExxonMobil announced its support for a carbon tax. Exxon representatives admonished conservatives, “You can’t beat something with nothing.” But in fact, conservatives defeated cap-and-trade by exposing it as cap-n-tax—a stealth tax on energy. Democrats lost the House in 2010 chiefly because they voted for Waxman-Markey. By what logic is it now smart politics for conservatives to support an open and avowed energy tax?

In the 2010 South Carolina GOP primaries, challenger Trey Gowdy beat incumbent Bob Inglis by 70 percent to 29 percent. Why? Chiefly because Inglis campaigned for a carbon tax and Gowdy campaigned against it. Inglis continues to preach carbon taxes to conservatives. But with cap-and-trade long dead and Scott Pruitt in charge at EPA, conservatives have less political reason than ever to advocate the policy that cost Inglis his congressional seat.   

Besides, it is untrue that conservatives have been trying to beat something with nothing. Our “something” is climate realism and an energy sector free to power a growing economy because government eschews all forms of market favoritism.

Progressives always want conservatives to help legitimize tax hikes and other unpopular proposals. Conservatives are the dumb party if we agree to provide bipartisan cover. Unfortunately, that has been known to happen.

One of the main groups today promoting carbon taxes is the so-called Climate Leadership Council whose members include George Shultz, James Baker, and other former GOP White House and cabinet officials. Baker was the doyen of the brain trust that advised President George H.W. Bush, in the infamous 1990 budget deal, to repudiate his “no new taxes” campaign pledge. Before Bush made that pledge, he was trailing Gov. Michael Dukakis in the polls by 17 points. The pledge energized conservatives, Bush’s numbers shot up, and on November 8, 1988, he won 40 states and 79 percent of the electoral votes.

However, advised to support a “balanced package” of tax hikes and spending restraint to cut the deficit, Bush agreed to include $165 billion in new taxes in the budget deal with House Ways and Means Chairman Dan Rostenkowski (D-IL). The spending restraint never materialized and deficits increased. However, the deal’s new taxes, which took effect immediately, chilled growth, tarnishing Bush’s credibility as a steward of the economy. Moreover, many in the base felt betrayed and stayed home during the 1992 elections. Bush became a one-term president despite high approval ratings for his handling of the 1991 Gulf War. Now Baker is advising Trump, who campaigned as a pro-energy tax-cutter to propose a new tax on energy. Even smart people don’t always learn from their mistakes.

On the Democratic side of the aisle, the main carbon tax proponents today are Senators Sheldon Whitehouse (D-RI) and Brian Schatz (D-HI). At a recent American Enterprise Institute symposium, Whitehouse and Schatz described their carbon tax bill as an olive branch, indeed an “olive limb,” held out to conservatives. That is nonsense.

Nowhere does their bill propose or imply that a carbon tax would replace and pre-empt any federal and state energy and climate regulations. Asked whether they would be willing to trade EPA regulations for a carbon tax if conservatives are game, Sen. Whitehouse said it would be “premature” for Democrats to negotiate among themselves. Conservatives must support their bill first, then the two sides can talk.

The Senators either don’t understand the economic case for a carbon tax or, more likely, their bill is just a divide-and-conquer strategy. In principle, a carbon tax is the most efficient climate policy because it allows all market actors, both producers and consumers, to find the cheapest ways to cut emissions. Indeed, in economic theory, the function of a carbon tax is to replace prescriptive regulations, which require particular compliance actions regardless of market signals. Layering a carbon tax on top of existing regulations would only increase the inefficiency of climate policy, imposing additional deadweight losses on the economy.

Only if the Whitehouse-Schatz bill repealed federal climate regulations, fuel economy standards, energy-efficiency mandates, and assorted “keep it in the ground” restrictions, and pre-empted similar state policies such as cap-and-trade programs and renewable energy quotas, would it resemble an olive branch. Even then, conservatives would have no reason to discuss the bill unless the Senators had lined up progressive movement support for a carbon tax-for-regulation swap.

So, in the guise of friendly outreach, Sens. Whitehouse and Schatz are actually inviting conservatives to capitulate on the main issue in dispute, namely, whether government should rig the marketplace against fossil fuels. Here’s what happens if we take the bait. We will cede the moral high ground and find it increasingly difficult to explain why we oppose cap-and-trade, the Clean Power Plan, or any other so-called climate solution.

The 2016 elections have given conservatives and free marketers an unexpected and rare opportunity to help a bold president change the direction of national policy. We squander that opportunity if we instead legitimize the progressive movement’s anti-fossil fuel crusade and promote an economically-destructive tax that would actually grow government under the pretense of streamlining it.