The entrenched power of the fossil-fuel industry and its political backers isn’t all that stands in the way of taxes on carbon pollution. Outmoded ideas and enduring myths about energy use and taxes are also factors.
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 are unfair to the poor and middle class.
Who says? Some low-income advocates, some left-of-center activists, some conservatives masking as populists.
Rebuttal: The wealthy use more carbon-based energy than the rest of us, by far. For example, for every gallon of gasoline used by the poorest quintile (20%) of households, the richest quintile uses three to four. (See Slideshow, Slide #26.) A similar pattern holds for the other sources of carbon pollution: electricity, jet fuel, even diesel fuel that powers the trucks that deliver goods. It’s true that consumption taxes, including carbon taxes are generally viewed as “regressive” — their impact on low-income households is a larger share of income than for people of greater affluence. But we can make carbon taxes progressive, i.e., beneficial to people of below-average means, by redistributing the tax revenues.
One option is direct distribution of carbon tax revenue via “dividends.” Climate scientist Jim Hansen calls for all carbon tax revenue to be returned to citizens in an equal, monthly “green check.” A worthy alternative, which Al Gore and many economists advocate, is “tax-shifting” — use carbon tax revenues to reduce regressive taxes such as sales taxes and payroll taxes. (See our Issues page, Managing Impacts.) British Columbia has enacted and annually increased its revenue-neutral carbon tax with popular support by dedicating all revenue to reducing a variety of other taxes ranging from sales taxes to business taxes.
What’s really regressive is the impact of global warming. Sea level rise, food shortages and extreme weather; storms like Katrina, Irene and Sandy hit the poorest hardest.
Myth #2. Carbon taxes won’t change habits — after all, high gasoline prices in 2008 didn’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 did cut usage, and by more than a little. Comparing 2008, the last pre-recession year, to 2003, U.S. gasoline usage was unchanged even though economic activity was up 13%. What did the trick was the 73% higher price “real” (inflation-adjusted) price. 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 have risen, 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, are even 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. (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 wind turbines, ethanol, hydrogen, nuclear power [pick one or more] will solve the problem.
Rebuttal: Standards and subsidies are blunt instruments — vehicle efficiency standards don’t reduce 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 experience confirms, that raising the price of a harmful activity is more effective than lowering prices of thousands of possible alternatives. 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, energy price volatility has wreaked more economic havoc than high or even rising prices. 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 — provided the revenues are distributed or tax-shifted back to Americans. And carbon taxes need not be draconian to accomplish their mission. Our program of recurring annual increases of $10-15 per ton of emitted carbon dioxide 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 global warming, as the National Academy of Sciences warns.
Myth #5. Carbon taxes will provide more revenue for government to squander.
Who says? Anti-tax groups, some conservatives, Tea-Partiers.
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, carbon taxes will put a big dent in fossil fuel use and CO2 emissions without having to earmark revenues for hybrid cars, mass transit, biofuels, etc. — or to lawmakers’ pet projects.
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 also 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 India, China and other emerging economies. 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 (or said)? Many “Big Green” groups, business organizations and corporations seeking a less transparent 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 political process has borne out our belief that carbon cap-and-trade was too complex, regressive, cumbersome and undemocratic to succeed. Supporters of cap-and-trade were never able to resolve this contradiction: either it wouldn’t raise fossil fuel prices, in which case it would be ineffectual; or it would raise them after all, provoking an unstoppable backlash among a citizenry that hadn’t signed off on the higher prices and wouldn’t be getting the dividends from the tax revenues, while carbon-market participants raked off huge profits. Moreover, cap-and-trade’s complexity guaranteed that it couldn’t be implemented for several years — the Northeast states’ electricity cap-and-trade system took 5 years to institute — whereas a carbon tax can be implemented within months, as British Columbia demonstrated with its 2008 carbon tax startup.
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, emphasizing revenue-neutral carbon taxing can 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 support from traditional environmentalists. 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 hopeful that the American people will rise to the challenge.