The entrenched power of the fossil-fuel industry and its political backers isn't all that stands in the way of climate-saving carbon taxes. Outmoded ideas and enduring myths about energy use and taxes are also a factor.
This page describes and dissects some of these misconceptions. Please send us your own favorite fallacies about carbon taxes. Ditto your suggestions or criticisms of ours.
Myth #1. New taxes on carbon emissions or energy will hurt the poor and middle class.
Who says? Some low-income advocates, some civil rights groups, some conservatives masking as populists.
Rebuttal: The wealthy use more energy by far. For example, for every gallon of gas used by the poorest quintile (20%) of households, the richest quintile use three to four gallons. (See Slideshow, Slide #26.) The same holds for electricity, jet fuel, even diesel that fuels the trucks that deliver goods. Carbon taxes can therefore be made progressive, i.e., beneficial to people of below-average means, by redistributing the tax revenues equally to all. A worthy alternative, which Al Gore advocates, is to "tax-shift" carbon tax revenues by reducing regressive taxes such as sales taxes and payroll taxes. (See our Issues page, Managing the Impacts.) Energy-efficiency measures can be targeted to subsets of the population that stand to be harmed, such as the rural poor who must drive long distances for work. What's really regressive is the ongoing laissez-faire rises in fuel prices, not a penny of which is rebated to the public. CTC is committed to making carbon taxing revenue-neutral and progressive.
Myth #2. Energy taxes won't change habits -- after all, high gas prices haven't cut usage.
Who says? An odd collection of groups and individuals, including former Sierra Club "CAFE" (car fuel-economy) lobbyist Dan Becker ("Even as gas prices have doubled and trebled over the past several years, we see little change in driving behavior," Becker told the New York Times in October, 2006.)
Rebuttal: Four points are key. First, the rise in gasoline prices has cut usage, and by more than a little. Comparing the first nine months of 2008 to the same period in 2007, U.S. gasoline usage fell more than 3% even though economic activity was up more than 2%. What did the trick was the 24% higher price (adjusted for inflation). Second, much of the increase in energy prices in recent years has been masked by price volatility; as we show here, since 2002 gas prices have fallen almost as often on a month-to-month basis as they rose during that period, masking the upward trend and convincing millions of Americans that prices would head south soon enough to make adjustments unnecessary. Third, other sectors, especially electricity generation, which emits almost twice as much CO2 as cars, historically have been more price-sensitive. Last, price-responsiveness will grow as households have opportunities to buy more fuel-efficient vehicles and appliances, and as society transitions to a more fuel-efficient infrastructure — once we enact carbon taxes to send clear and strong price signals. Last, (See our Issues page, Carbon Tax Effectiveness, for more discussion.)
Myth #3. Taxes on carbon emissions aren't necessary. Vehicle efficiency standards and mandates or subsidies for windmills, ethanol, hydrogen, nuclear power [pick one or more] will solve the problem.
Who says? Special interests, many environmental groups, many security advocates, technology buffs.
Rebuttal: Standards and subsidies are blunt instruments -- vehicle efficiency standards don't influence vehicle usage, for example -- and are often contested for years and then undermined by "gaming" (viz., the 20-year stasis in CAFE standards, or tax credits for hybrid SUV's). Moreover, fuel usage is ever-changing and diffuse (more than 55% of petroleum is not used in cars or light trucks, for example), while efficiency standards are by nature both usage-specific and frozen in time. As for supply, it is the rare energy subsidy that has actually brought forth meaningful amounts of new energy. Economic theory predicts, and hard experience confirms, that only taxes on fuels can create the clear, rapid, across-the-board incentives needed to propel a massive shift to clean alternatives.
Myth #4. Heavy fuel taxes will impede economic recovery.
Who says? Traditional growth champions, fossil fuel interests.
Rebuttal: Traditionally, what has caused economic havoc hasn't been high energy prices or even rising prices, but price volatility. Even fairly steep price increases can be manageable so long as they're regular and predictable, particularly now that the share of economic activity occupied by the fossil fuels sector is at an historic low. And carbon taxes need not be draconian to accomplish their mission. Our program of recurring annual increases of $37 per ton of emitted carbon equates to 5-10% increases in energy prices per annum (with the percentages shrinking as the "base" rises and as non-fossil energy assumes a larger share). By comparison, the average annual real increase in U.S. gasoline prices in 2003-07 was 11%, and this didn't stop the economy from growing at 3% a year. Needless to say, the true long-term threat to the economy (and everything else) is unchecked climate change, as the Stern Report has shown.
Myth #5. Carbon taxes will provide more revenue for government to squander.
Who says? Anti-tax groups, some conservatives.
Rebuttal: Not if the tax is made revenue-neutral via dividends and/or tax-shifting (see Myth #1). Because higher taxes on fuels will create a strong "market pull" to clean energy, the revenues don't need to be earmarked for hybrid cars, mass transit, biofuels, etc. -- or to lawmakers' pet projects -- for carbon taxes to put a big dent in fossil fuel use and CO2 emissions.
Myth #6. Heavy fuel taxes will price U.S. goods out of the marketplace.
Who says? Some business groups, some labor unions.
Rebuttal: This argument assumes a static economy, sans adaptation and innovation. In reality, increased energy taxes will shrink the trade deficit (by cutting both volumes and pre-tax prices of foreign oil). Reduced reliance on oil imports will make it harder to justify military expenditures and activities on grounds of protecting foreign supplies. The higher prices will also spark innovation in clean, efficient technologies better suited for world markets than, say, supersized automobiles. Finally, taxing energy will create parity with our traditional competitors -- the EU and Japan -- while encouraging like-minded actions in the emerging powerhouses of India and China. In the interim, “border tax adjustments” can equalize prices of imports from non-carbon-taxing nations.
Myth #7. A carbon cap-and-trade system is as good as a carbon tax, and is far more politically feasible.
Who says? Some "Big Green" groups, business organizations and corporations seeking a less provocative way to put a price on a carbon.
Rebuttal: Click here for CTC's dissection of the logistical and strategic differences between carbon taxes and cap-and-trade (they're not minor). As for political feasibility, the landscape has changed radically in the year or two since a few prominent environmental lobby groups threw in their lot with cap-and-trade. Public concern over climate is at critical mass, complex financial instruments have been discredited, and the success of the movement to elect Barack Obama to the presidency signals an era of new possibilities, including, perhaps, an end to the shibboleth against taxes (especially revenue-neutral ones). Congress is starting to take carbon tax proposals seriously. Acceding to cap-and-trade may have seemed necessary several years ago, but it may now be a case of setting the bar too low.
Myth #8. Americans are too myopic, and our politics too broken, for even revenue-neutral carbon taxation to ever take root here.
Who says: Veterans of failed past efforts to take on entitlements; assorted skeptics and cynics -- including, sometimes, ourselves.
Rebuttal: This is the one myth even we at CTC can't dismiss out of hand. Witness the failure of past fuel-tax efforts, the resistance to fossil-fuel-displacing wind farms in some rural areas, and the persistence of costly tax entitlements like the deductibility of home mortgage interest payments from federal taxes -- each, in its own way, testament to the dictum that "losers cry louder than winners sing," in the words of University of Michigan tax policy expert Joel Slemrod.
Nevertheless, we're betting on a different outcome for carbon taxes. For one thing, we see in the 2008 election results at least a partial lifting of the anti-tax fever that poisoned discourse over tax policy for decades. Moreover, continued emphasis on revenue-neutral carbon taxing will help dispel the presumption that a carbon tax is a tax hike. Second, because the non-climate benefits of carbon taxes are enormous, from reduced dependence on foreign oil to less traffic gridlock, there are many opportunities to broaden the constituency. Finally, unlike 1980 or 1993, when fuel-tax proposals went down to defeat, the stakes this time are high -- frighteningly so. Stiff carbon taxes can't rescue the climate by themselves, but without them a rescue is virtually inconceivable. We're confident the American people will rise to the challenge.
