Rent seekers, virtue signalers and green lobbyists will love it. Taxpayers not so much.
This could be the year Congress tries to enact the mother of all taxes, a carbon tax—a levy on the use of oil, natural gas and coal. Everything that is fabricated, grown, operated or moved is made possible by hydrocarbons. That makes the carbon tax different from a mere consumption or excise tax. The latter is attached to purchasing—spend more, pay more. A carbon tax is a tax on existence, because all aspects of living require energy, and hydrocarbons provide 80% of America’s energy, more for the rest of the world. And hydrocarbons are used to create or build everything else that produces energy.
Who would support such a tax? Four intersecting constituencies: those who embrace the idea as an essential step to “fixing” the climate; those agnostic about climate claims but eager to check the box for political expediency; those in search of some “grand bargain” on tax or regulatory reform; and those eager to find more ways to extract money from the economy. This mélange of motives covers a lot of political territory.
Advocates say a carbon tax would reduce the use of hydrocarbons by creating a disincentive. The money collected could be used to subsidize alternative energy sources. Grand-bargainers want to split the carbon tax bounty to offset or eliminate other taxes or regulation they deem more onerous. Some conservatives claim a carbon tax is in theory a more efficient way than regulation to reduce carbon emissions.
But the idea that a carbon tax is a painless, efficient way to reduce hydrocarbons fails for three reasons.
First, cost aside, it would take decades—probably a century—to restructure America’s energy ecosystem. That means a carbon tax would be effectively permanent. The financial and physical scale of the energy infrastructure is so enormous that changing it isn’t, to use the popular analogy, like changing the course of a supertanker, but of a ship 1,000 times as large as a supertanker. The U.S. has already spent hundreds of billions of dollars on green subsidies with piddly results. Wind and solar combined, the favored alternatives to hydrocarbons, provide a mere 3% of the country’s energy.
Second, citizens eventually react when governments raise the cost of living. The raison d’être for a carbon tax is to use price to shift consumer behavior. Ask France’s President Emmuanel Macron how that’s going—and he was shooting for a mere 5% fuel-tax hike. Even a 50% levy wouldn’t be enough to drive hydrocarbon consumption downward; it would only slow the rate of growth.
We know this because the market has done the experiment. In the decade before the 2008 recession, when global economies were booming, world-wide demand for oil increased even as prices rose 200%. Oil use dropped only when the economy collapsed. History shows technology yielding a long-run average price for oil around $50 a barrel. Thus it would take something like a 300% tax to reduce consumption. A carbon tax of, say, 10%, even if it proved politically tolerable, would only slow growth immeasurably in hydrocarbon demand, thus failing in its central goal.
Third, the U.S. uses such enormous quantities of hydrocarbons that even a small carbon tax would add hundreds of billions of dollars to government coffers, stimulating a rent-seeking land rush. We can already see how the battle over this cash gusher would shape up.
One compromise, offered by former Secretaries of State James Baker and George Shultz and their Climate Leadership Council, claims to “unlock the political viability,” in the words of two council members, by surreptitiously renaming the tax a “fee.” They would then redistribute the proceeds to the citizenry as a “carbon dividend” to offset the pain of higher daily costs. But the fee wouldn’t reduce hydrocarbon use unless it were exorbitant.
The Baker-Shultz plan would ratchet up the fee should consumers fail to behave. So far so good for the green camp, but the “dividend” hits a roadblock in not subsidizing nonhydrocarbons and, worse, proposing simultaneously to eliminate carbon regulations that “are no longer necessary” or are “too intrusive.” For Washington’s green lobbyists, those are fighting words.
And we’re talking politics. Once the parties have agreed to the principle—a new carbon tax, or “fee”—the horse trading would begin. Split the difference: a dividend here, a subsidy there. Raise the fee to make everyone happy.
Even a compromise that yielded enough in subsidies to double the green-tech growth “progress” of the past couple of decades would result in wind and solar supplying less than 10% of America’s energy. Even with subsidies, it would be a struggle to keep nuclear power and corn alcohol at 10% of America’s energy supply. Meanwhile, the absolute level of hydrocarbon consumption would still go up, comprising a slightly smaller share of a much larger pie.
For rent-seekers, this would all be good. For virtue-signalers, it would be sufficient. For green lobbyists, it would be progress. For cynics—well, what do they care? Everyone would benefit—except taxpayers. And since energy is essential to everything physical and economic flowing through society, a carbon tax would finally enable Congress to achieve nirvana, succinctly lampooned by President Reagan: If it moves, tax it.
This piece originally appeared at The Wall Street Journal
Mark P. Mills is a senior fellow at the Manhattan Institute and a faculty fellow at Northwestern University’s McCormick School of Engineering. In 2016, he was named “Energy Writer of the Year” by the American Energy Society. Follow him on Twitter here.
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