The Lame-Duck Carbon Tax Lob

by | Nov 28, 2018 | Energy

A carbon tax with a realistic possibility of being signed into law, would not be the revenue-neutral, regulation-busting efficient solution that libertarian and conservative tax advocates desire. The political forces on the left want no part of an even nominally market-based solution.

The Deutch Plan

Congressman Ted Deutch (D-Fla.) has announced his intention to introduce a new carbon tax proposal in the House of Representatives. The Deutch proposal, officially “The Energy Innovation and Carbon Dividend Act,” would establish a carbon tax of $15 per ton of carbon dioxide equivalent in 2019, set to increase by $10 every year thereafter. The tax would be imposed on any covered entity’s use, or sale or transfer for use, of any covered fuel. Covered fuels include crude oil, natural gas, coal, and derived products. Covered entities include, but are not limited to, refineries, petroleum importers, coal mining operations, coal importers, and companies entering pipeline quality natural gas into the transmission system. Reps. Francis Rooney (R-Fla.), Brian Fitzpatrick (R-Pa.), John Delaney (D-Md.), and Charlie Crist (D-Fla.) are co-sponsors.

The Deutch tax plan’s $15 starting point masks its severity. The relatively-low $15 is not where our attention should focus considering the increase of $10 annually. Such a structure means that within five years the tax would be over $50 per ton (in inflation-adjusted terms). According to the handy Resources for the Future carbon tax calculator a tax at that level would mean a hike in the price of gasoline by more than 22 percent. Other fuel price hikes would be even larger. A tax that climbs to over $100 per ton by 2030 is a harrowing prospect indeed.

Revenue-Recycling Strategy

The plan was hatched with the guidance of the Climate Leadership Council and, accordingly, allocates its revenue in the form of lump-sum rebate checks delivered to households. According to the proposal’s draft text, the Treasury would be responsible for redistributing tax revenue via monthly so-called dividend payments to American families. Interestingly, the plan contains an anti-natalist element—capping families’ eligibility for pro-rata shares at two children. Climate Leadership Council Vice President Greg Bertlesen, who joined Congressman Deutch on a conference call with the press, has described the lump-sum rebate approach as having more political viability than other revenue-recycling approaches thanks to its focus on minimizing the harmful effects of the carbon tax on low-income families who allocate a more significant proportion of their budgets to covering energy expenses.

The lump-sum rebate approach is one of the numerous strategies that IER’s recently-published study conducted by Capital Alpha Partners, LLC., “The Carbon Tax: An Analysis of Six Potential Scenarios,” evaluates. The findings do not bode well for Congressman Deutch’s proposal.

While the Capital Alpha study does not, of course, model the exact parameters of this newly-announced plan, an evaluation of the revenue-recycling strategy is nevertheless informative. When taking heed of the Joint Committee on Taxation’s standard 25-percent offset, recycling revenue via lump-sum rebates in all six analyzed carbon tax scenarios results in persistent economic underperformance. The study indicates that such an approach would reduce GDP by as much as 1.67 percent relative to the reference case at the beginning of the forecast period before the effects taper off. But lost production in the interim is never recovered. With a lump-sum rebate as the revenue-recycling strategy, the modeled scenarios result in lost GDP equal to between $1.88 trillion and $2.86 trillion in constant 2015 dollars over a standard 10-year budget period and between $3.76 trillion and $5.92 trillion over the study’s entire 22-year forecast period. In fact, the lump-sum rebate approach is uniquely damaging among revenue-recycling strategies.

Even carbon tax advocates such as Noah Kaufman, of the Columbia Center on Global Energy Policy, agree on this point. According to Kaufman’s evaluation:

Using revenues for rebates under the Deutch plan would sacrifice opportunities for better macroeconomic outcomes or government services. The Whitehouse proposal returns revenues to Americans primarily by cutting the payroll taxes paid by workers, which would boost the economy by encouraging work. The Curbelo proposal allocates the revenue to government programs to support transportation infrastructure, energy innovation, climate change adaptation, and assistance for displaced workers.

The Capital Alpha study indicates that the only way to construct a pro-growth carbon tax would be to allocate the entirety of the available revenue to corporate tax reductions. And even that is tenuous.

Timing

Another factor to consider with this bill is its timing and motivation. No one (sponsors included) expects this bill to ever become law. The political realities in a certain sense remove constraints on tax drafters, enabling Congressman Deutch and his colleagues to establish in the minds of the public the aggressive increase structure and, I fear, anchor future negotiations. In comparison, a tax that increases by 2 percent annually (such as July’s proposal by soon-to-be-former Congressman Curbelo) will look more reasonable and tempt compromise.

Regulatory Relief and Political Compromise

As my colleague Robert Murphy warns, a carbon tax is unlikely to satisfy the demands of the political left, despite the assurance of libertarian and conservative carbon tax advocates. Carbon-mitigation plans emerging from the political left sometimes include a carbon tax, but only as one aspect in the suite of coercive measures it deems necessary for climate action. “Every aspect of our lives, from our cars to our meals to our family sizes, affects global emissions—and therefore,” Murphy concludes, “the interventionists want every tool at their disposal to control others.” Responses to the Deutch proposal have confirmed Murphy’s appraisal. Take, for example, the statement published by Wenonah Hauter, executive director of Food and Water Watch:

The Deutch proposal amends the Clean Air Act so that the same sources of greenhouse gas emissions covered by the carbon tax are not subject to separate regulations by the Environmental Protection Agency (EPA). For example, it would suspend regulations of CO2 emissions from power plans, such as the Trump administration’s proposed Affordable Clean Energy Plan that would replace the Obama administration’s Clean Power Plan. (The carbon tax would reduce power plant CO2 emissions by far more than either of these regulations.) It would also suspend regulations of CO2 from energy use by industrial sources—EPA has had the authority to regulate these emissions since 2009, but it has not done so. Under the Deutch proposal, if actual emissions exceed the emissions targets by 2030, EPA is instructed to impose regulations to fill this emissions gap.

A carbon tax with a realistic possibility of being signed into law, would not be the revenue-neutral, regulation-busting efficient solution that libertarian and conservative tax advocates desire. The political forces on the left want no part of an even nominally market-based solution.

A related aspect of this discussion is that any carbon tax bill will be subject to unsavory horse-trading as the political process plays out in Washington. And, indeed, the Deutch proposal itself includes a massive exemption for a powerful interest group: agriculture. According to the draft text, “If any covered fuel or its derivative is used on a farm for a farming purpose, the Secretary shall pay (without interest) to the ultimate purchaser of such covered fuel or its derivative, the total amount of carbon fees previously paid upon that covered fuel, as specified by rule of the Secretary.” This exemption blatantly undermines the tax’s claimed purpose of reducing emissions.

If this is the bill we see when drafters have no expectation of passage, what will a bill that aims for true viability look like?

Conclusion

The Deutch plan fails to respect the economics literature, which warns of the perils of the lump-sum rebate. With its rapidly-escalating price structure, this lame-duck lob is highly unlikely to make a dent on Capitol Hill. Tax opponents should be wary, however, of this plan serving as an anchor in discussions of climate policy when the 116th Congress convenes next year. And, lastly, though all carbon taxes entail a degree of coercion, Congressman Deutch’s misanthropic, Malthusian two-child dividend limit is an uncommonly concerning intrusion into the private sphere.

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Jordan McGillis serves as the Deputy Director of Policy for the Institute for Energy Research.

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