Happy New Year – A New Political Reality for Carbon Taxes

For too long the conventional wisdom has been that while carbon taxes may be superior to cap-and-trade schemes, there is no way that politicians would ever support a new tax, even one that was revenue-neutral. Environmentalists who might otherwise be supporting a carbon tax because it could produce real reductions in greenhouse gas emissions far more rapidly than cap-and-trade have dismissed carbon tax advocacy as naive and have rallied behind cap-and-trade.

Just as conventional wisdom was consistently proven wrong in the 2008 presidential election, it’s also proving wrong about the political infeasibility of a carbon tax. Just look at events over the past two days.

On Saturday, the lead editorial in the New York Times, The Gas Tax, made a compelling case that the president-elect and Congress should impose a “gas tax or similar levy to keep gas prices up after the economy recovers from recession.”

On Sunday, two prominent Republicans, Congressman Bob Inglis of South Carolina and supply-side economist Arthur Laffer, unequivocally endorsed a U.S. carbon tax in a New York Times op-ed, An Emissions Plan Conservatives Could Warm To, that concisely summarized the politics of climate change and the rationale for a carbon tax from a conservative perspective:

Conservatives don’t support tax increases that are veiled as “cap and trade” schemes for pollution permits. But offer us a tax swap, and we could become the new administration’s best allies on climate change.

The Inglis/Laffer summary of why the Liberman-Warner cap-and-trade bill failed is short and to the point:

A climate-change bill withered in Congress this summer because families don’t need an enormous, and hidden, tax increase. If the bill’s authors had instead proposed a simple carbon tax coupled with an equal, offsetting reduction in income taxes or payroll taxes, a dynamic new energy security policy could have taken root.

Inglis/Laffer cogently present the economic basis for a carbon tax:

We need to impose a tax on the thing we want less of (carbon dioxide) and reduce taxes on the things we want more of (income and jobs). A carbon tax would attach the national security and environmental costs to carbon-based fuels like oil, causing the market to recognize the price of these negative externalities.

They recognize that “the costs of reducing carbon emissions are not trivial” and the concomitant need for revenue-neutrality in carbon pricing:

It is essential, therefore, that any taxes on carbon emissions be accompanied by equal, pro-growth tax cuts. A carbon tax that isn’t accompanied by a reduction in other taxes is a nonstarter. Fiscal conservatives would gladly trade a carbon tax for a reduction in payroll or income taxes, but we can’t go along with an overall tax increase.

Inglis/Laffer directly address concerns that putting a price on carbon (whether through a carbon tax or cap-and-trade) would put Americans at a competitive disadvantage:

If China and India join the United States in attaching a price to carbon, their goods should come into this country without a carbon adjustment. But if they do not, every item they place on our shelves should be subject to the same carbon tax that we would place on our domestically produced goods, again offset by a revenue-neutral tax cut.

If World Trade Organization rules entitle members to an unwarranted exemption from such a carbon tax, then we should change them. Outliers should not be allowed to frustrate the decision-making of the countries that are trying to prevent the security and environmental train wrecks of this century.

Although other conservatives including George W. Bush speechwriter David Frum and the American Enterprise Institute’s Ken Green have made similar arguments, Inglis and Laffer are the two most prominent Republicans to publicly articulate such a clear pro-carbon tax position.

The same day as the Inglis/Laffer op-ed, conservative pundit Charles Krauthammer published his own strong endorsement of a gas tax. Though his Weekly Standard article, The Net-Zero Gas Tax – A Once-in-a-Generation Chance, begins by describing Americans’ “deep and understandable aversion to gasoline taxes,” Krauthammer quickly presents what he refers to as the “blindingly obvious” energy independence and other benefits of an increase in the federal gas tax, and proposes what he calls:

Something radically new. A net-zero gas tax. Not a freestanding gas tax but a swap that couples the tax with an equal payroll tax reduction. A two-part solution that yields the government no net increase in revenue and, more importantly — that is why this proposal is different from others — immediately renders the average gasoline consumer financially whole.

Krauthammer envisions the simultaneous enactment of a carbon tax and an offsetting reduction of payroll taxes, with the payroll tax reduction kicking in a week before the gas tax takes effect. He notes as a “nice detail” the fact that the payroll deduction would be “mildly progressive” and follows with a constructive analysis of some of the nitty-gritty details of implementing his net-zero gas tax.

Finally, Times columnist Thomas Friedman weighed in with yet another strong call for a gasoline and/or carbon tax in Win, Win, Win, Win, Win. Echoing the previous day’s Times editorial, Friedman states what should be obvious:

It makes no sense for Congress to pump $13.4 billion into bailing out Detroit — and demand that the auto companies use this cash to make more fuel-efficient cars — and then do nothing to shape consumer behavior with a gas tax so more Americans will want to buy those cars. As long as gas is cheap, people will go out and buy used S.U.V.’s and Hummers. (emphasis in original)

Friedman follows with a geopolitical argument very similar to that made by Inglis, Laffer and Krauthammer:

A gas tax reduces gasoline demand and keeps dollars in America, dries up funding for terrorists and reduces the clout of Iran and Russia at a time when Obama will be looking for greater leverage against petro-dictatorships. It reduces our current account deficit, which strengthens the dollar. It reduces U.S. carbon emissions driving climate change, which means more global respect for America. And it increases the incentives for U.S. innovation on clean cars and clean-tech.

The weekend explosion of support for carbon and/or gas taxing followed by just three weeks a similar confluence, also described here, in which Thomas Friedman called for a carbon tax, the Wall Street Journal stated its clear preference for a carbon tax over cap-and-trade and Ralph Nader and Toby Heaps made a compelling case for pricing carbon emissions via a tax rather than a trading scheme in a Wall Street Journal op-ed.

This convergence of opinion from Left and Right signals an extraordinary opportunity to obtain bipartisan support for a revenue-neutral carbon tax. As Congressman Inglis and Mr. Laffer conclude:

As president, Barack Obama, by working with conservatives as well as the members of his own party, can at once clean the air, create jobs and improve the national security of the United States — a triple play for the next American century.

Will the environmental community unite to actually help pass climate change legislation? That remains to be seen as environmental groups continue to be split between carbon tax and cap-and-trade camps. I’ve worked closely with some of the groups supporting cap-and-trade, have tremendous respect for them and know they understand how important it is to put a price on carbon and to make very large reductions in greenhouse gas emissions as soon as possible. I know that some cap-and-trade supporters are genuinely convinced that a carbon tax is simply not possible politically. Will that change as bipartisan support grows for a revenue-neutral carbon tax? 

It’s time to recognize that 2008’s conventional wisdom is wrong. If we join together in a bipartisan alliance, Congress can adopt and implement a carbon tax in 2009.

Photo: Valerio Schiavoni / Flickr.