Editorial: The Carbon Tax Chimera

  • Date: 27/02/17
  • Editorial, The Wall Street Journal

The Shultz-Baker proposal sounds better than it would work.

The climate may change but one thing that never does is the use of climate change as a political wedge against Republicans. Also never changing is the call from some Republicans to neutralize the issue by handing more economic power to the federal government through a tax on carbon. The risk is that Donald Trump takes up the idea, which would hurt the economy with little benefit to the environment.

George Shultz and James Baker, the esteemed former secretaries of State, have joined a group of GOP worthies for a carbon tax and recently pressed the case in these pages. They propose a gradually increasing tax that would be redistributed to Americans as a “dividend.” This tax on fossil fuels would replace the Obama Administration’s Clean Power Plan and a crush of other punitive regulations. Energy imports from countries without a similar structure would face a tax at the border.

A carbon tax would be better than bankrupting industries by regulation and more efficient than a “cap-and-trade” emissions credit scheme. Such a tax might be worth considering if traded for radically lower taxes on capital or income, or is narrowly targeted like a gasoline tax. But in the real world the Shultz-Baker tax is likely to be one more levy on the private economy. Even if a grand tax swap were politically possible, a future Congress might jack up rates or find ways to reinstate regulations.

Another problem is the “dividend.” A carbon tax would be regressive, as the poor spend more of their income on gasoline and household energy. The plan purports to solve this in part by promising to return the tax to the American public. But the purpose of taxes is to fund government services, not shuffle money from one payer to another. No doubt politicians would take a cut to funnel into renewable energy or some other vote-buying program.

The rebates would also become a new de facto entitlement with an uncertain funding future. A family of four would receive a $2,000 payout in the first year from a carbon tax, according to a report from the Climate Leadership Council, and that “amount would grow over time as the carbon tax rate increases.” But the point of taxing carbon is to emit less of it, and eventually revenues would decline as the tax rate rises. The public would then receive minimal or no help paying for energy the government made more expensive, and the progressives will try to make up the difference by raising other taxes.

Meanwhile, the energy import fee looks like an appeal to Mr. Trump’s protectionist impulses, but it’s too clever by half. The idea is an attempt to export U.S. climate and tax policy with the threat of tariffs, which other countries my resent. It’s a particular stick in the eye to Canada and Mexico and the promise of North American energy security. China and India aren’t likely to follow while they need fossil fuels to lift millions out of poverty.

The anticarbon Republicans want a commission to consider after five years whether to raise the tax based on the “best climate science available,” but all methods of calculating a price for carbon are susceptible to political manipulation. The Obama Administration spent years fudging “social cost of carbon” estimates to justify its regulatory agenda. The tax rate would also be influenced by international climate models that have overestimated the increase in global temperature for nearly two decades.

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