For a brief shining moment the other day, it looked as if the Trump Administration was considering a carbon tax. Combined with its aggressive effort to roll back clean air regulations, this might have created a striking—and potentially positive response—to climate change. In effect, the White House could have taken the lead in using market prices, instead of complex regulation, to reduce demand for fossil fuels.
More than that, a carbon tax might have also jump-started floundering efforts to reform the tax code. Congressional Republicans and the White House are scrambling to find revenue to pay for their much-desired corporate tax rate cuts. A levy on carbon would have been a good start. To learn how, take a look at this paper by my Tax Policy Center colleagues Donald Marron and Eric Toder. Another paper by Donald and TPC’s Adele Morris looks at other uses for carbon tax revenues.
Or course, it was all too good to be true. The idea was leaked to a couple of Washington Post reporters, who dutifully ran it up the policy flagpole. Within hours, just a whisper of a rumor generated a cacophony of outrage, and, as these things usually go, the White House denied that it had ever seriously considered such a heretical idea.
This surprised no one, since it would require a stunning change of heart by the President. After all, he ran as the candidate of coal miners, blasting President Obama for his “war on coal.” Since 2012, he has repeatedly called climate change a hoax. Oh, and less than a year ago, every single House Republican voted for a non-binding resolution denouncing a carbon tax as “detrimental to American families and businesses, and… not in the best interest of the United States.”
But clearly some important people in the Administration are thinking about it. They should. It is a good idea. And it could fit well with Trump’s interest in deregulating power plant emissions, auto mileage, and the like.
There are many advantages of market pricing. A tax is more efficient than a rules-based system and has the added fiscal benefit of raising revenue rather than increasing regulatory costs.
It turns out that the Environmental Protection Agency is among the most efficient federal agencies. The Office of Management & Budget estimates that an older set of clean air rules (though not the recent Obama-era regs) produced $30 of benefit for every$1 of cost. (I would have linked to the original OMB study, but it has been removed from the agency’s website).
Still, a tax would be more efficient. Simply raise the price of carbon and people will buy less of it. No need for complex auto mileage standards or costly power plant reporting requirements. Carmakers will produce energy-efficient cars because consumers, who are extremely responsive to fuel prices, will demand them. And utilities, which are at least as responsive to fuel prices, will seek the least costly—and least polluting—sources of energy.
Making the politics work will not be easy. Progressives mistrust a tax alone and will instead insist on a belt-and-suspenders regime of rules and taxes. Conservative politicians, who once supported the idea of a market pricing model no longer do. For example, the GOP’s 2008 Presidential candidate John McCain backed a cap-and trade system that is close kin to a carbon tax, but few Republicans back the idea now.
This week’s bright shining moment for the carbon tax has dimmed. But tax reformers will need revenue. Environmentalists do want to see less use of fossil fuels. The idea will be back—eventually.
