The February 8 proposal published by the Climate Leadership Council made a big splash, including an op-ed in the Wall Street Journal signed by James A. Baker III and George P. Schultz, and extensive, coordinated media coverage.
- “A gradually increasing carbon tax.”
- “Carbon dividends for all Americans.”
- “Border carbon adjustments.”
- “Significant regulatory rollback.”
Suppose Congress enacted it as proposed. What are its internal contradictions?
- The proposed carbon tax cannot be assured of increasing gradually or have any upper limit.
Pigouvian taxes are popular among economists as tools for remedying externalities. To do so, the tax is set equal to the estimated marginal damage caused by the taxed activity. But a successful Pigouvian tax depends on the taxing jurisdiction’s indifference between actually eliminating the externality and generating revenue. And the history of Pigouvian taxes suggests that governments care more about the revenue than eliminating the externality. We’ve posted on that several times (see, e.g., soft drink taxes, cigarette taxes, cap and trade, and carbon taxes).
As proposed, this Pigouvian would be open-ended. The tax would start at $40/tonne and rise $5/tonne every year. There isn’t even a stated
theoretical upper bound. Moreover, no future Congress could be constrained from increasing the tax to generate more revenue. It is implausible to assume that this wouldn’t happen.
- Rebate to households via dividend checks of all carbon tax revenue cannot be assured, and here can be no assurance that dividends would be distributed equally.
The proposal has two components: (a) revenue neutrality and (b) equal per capita distribution. Even if both components were enacted today, neither component would be assured.
Revenue neutrality requires that all carbon tax receipts be rebated to the public through either cash (as proposed here) or by dollar-for-dollar
reduction in other taxes. Even if revenue neutrality were enacted today, no future Congress could be prevented from increasing the tax or reducing the rebate in order to produce net revenue.
Equal distribution of dividends suffers from the same defects. No future Congress could be prevented from using the dividend scheme to redistribute wealth. Congress could do this many different ways, such as subjecting dividend receipts to taxation.
The plan’s authors approvingly say that dividends to households would grow over time as the carbon tax increases (gradually or otherwise). But
this assumes Congress would never succumb to the temptation to break the bond of revenue neutrality.
Finally, there are serious implementation problems the authors have not addressed. The Social Security Administration, which the authors recommend as the distribution agent, would have to adjudicate untold numbers of duplicative dividend claims, thus necessitating potentially extravagant paperwork burdens. The scheme is highly susceptible to fraud, such as identity theft.
- Border carbon tax adjustments are difficult to calculate, would require an army of new government employees to implement, and would invite unlimited special interest pleading for exemptions and discounts.
The House is considering tax reform legislation that could include a “border adjustment tax.” This provision, which plan co-author Martin
Feldstein supports, is highly controversial but it has the virtue of being fairly easy to calculate. That’s not true for a carbon adjustment tax. The carbon content of every good imported or exported would have to be estimated, and that likely would require a significant federal bureaucracy. Disputes about these estimates would be legion and each would have to be adjudicated, possibly in federal court. Finally, there would be
substantial opportunities for special pleading, and policy-makers likely would be sensitive to some of these pleas.
- Promised regulatory rollbacks may be illusory.
In return for enactment of this carbon tax, the authors propose phasing out certain Obama administration regulations, “including an outright repeal of the Clean Power Plan.” That would require an amendment to the Clean Air Act explicitly denying EPA authority to regulate carbon emissions, which must be assumed would be included within the legislation enacting the carbon tax.
That change likely would not be sufficient, however. EPA would retain the authority to regulate criteria and toxic air pollutants, and it is hard to imagine how it could be prevented from setting standards without consideration of climate change. EPA is heavily invested bureaucratically in this mission, and it is unrealistic to expect the Agency to abandon it.
The first pillar of a carbon dividends plan is a gradually increasing tax on carbon dioxide emissions, to be implemented at the refinery or the first
point where fossil fuels enter the economy, meaning the mine, well or port. Economists are nearly unanimous in their belief that a carbon tax is the most efficient and effective way to reduce carbon emissions. A sensible carbon tax might begin at $40 a ton and increase steadily over time, sending a powerful signal to businesses and consumers, while generating revenue to reward Americans for decreasing their collective carbon footprint.
All the proceeds from this carbon tax would be returned to the American people on an equal and quarterly basis via dividend checks, direct deposits or contributions to their individual retirement accounts. In the example above, a family of four would receive approximately $2,000 in carbon dividend payments in the first year. This amount would grow over time as the carbon tax rate increases, creating a positive feedback loop: the more the climate is protected, the greater the individual dividend payments to all Americans. The Social Security Administration should administer this program, with eligibility for dividends based on a valid social security number.
Border adjustments for the carbon content of both imports and exports would protect American competitiveness and punish free-riding by other nations, encouraging them to adopt carbon pricing of their own. Exports to countries without comparable carbon pricing systems would receive rebates for carbon taxes paid, while imports from such countries would face fees on the carbon content of their products. Proceeds from such fees would bene t the American people in the form of larger carbon dividends. Other trade remedies could also be used to encourage our trading partners to adopt comparable carbon pricing.
4. SIGNIFICANT REGULATORY ROLLBACK
The final pillar is the elimination of regulations that are no longer necessary upon the enactment of a rising carbon tax whose longevity is secured by the popularity of dividends. Much of the EPA’s regulatory authority over carbon dioxide emissions would be phased out, including an outright repeal of the Clean Power Plan. Robust carbon taxes would also make possible an end to federal and state tort liability for emitters. To build
and sustain a bipartisan consensus for a regulatory rollback of this magnitude, the initial carbon tax rate should be set to exceed the emissions
reductions of current regulations.