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Let’s Tax Carbon

It’s the worst form of energy policy, except for all those others that have been tried

May 26, 2014, Vol. 19, No. 35 • By IRWIN M. STELZER
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Suppose, instead, policymakers say to consumers: Consume all the energy you want, in whatever form. But pay the full cost that you impose on society by so doing. Buy your Tesla electric car, but don’t expect taxpayers to bear part of the cost or provide you with roads to which you do not contribute because you use no gasoline. Keep your thermostat at 60 degrees in the summer and 80 in the winter, but don’t expect to get taxpayers to help out with your utility bills. 

And to producers: Generate electricity any safe way you find most efficient, but don’t look only to your narrow-visioned accountants to calculate the cost of what you are doing. Factor in the cost of carbon emissions when you plan future investments in order to account for the risks to the value of those investments from costly future regulations. Some companies, among them ExxonMobil, have started to do just that. A carbon tax would enable you to do that, without worrying that your competitors might not be so forward-looking. Are you pleased with the current system of regulation that will reduce the coal industry to a shadow of its former self, stall or perhaps in the end prevent oil flowing to us from Canada to displace stuff from unstable, hostile countries, or would you prefer to pay for what you do to the environment in exchange for a removal or reduction of uneconomic regulations? Do you really think you can provide the mining and refining capacity the country needs, and the associated infrastructure under the current system, or would you rather offer a trade—carbon taxes for less stringent regulation on new investments, and perhaps lower corporate taxes? 

To those who blanch at the thought of any tax, not least a carbon tax, I ask: What is your plan when it becomes clear that we can’t finance an adequate military from current revenues? Worried about Chinese expansion at the expense of America’s allies? A resurgent Russia that has its eyes on the territory of some of our NATO allies? Beefing up our southern borders so that we can proceed with immigration reform without triggering a new wave of illegal entry? Larger deficits? Then you will need money. Would you prefer higher income taxes? Increased wealth taxes? Or a tax that merely incorporates the social cost of carbon consumption into its price, so that the polluter pays and consumers see real prices when they decide between consuming and abstaining from consumption of carbon-heavy products? 

Should we favor policies that will certainly make our enormous coal resources less available, or policies that force producers and consumers to pay for any damage coal usage does to the environment, with only such reduction in consumption as might result from the free exercise of consumer choice? Should taxpayers continue to subsidize renewables so that once fossil-fuel facilities have been decimated we will be left with the unpalatable choice of continuing such subsidies indefinitely or doing without the energy provided by the departed fossil-fuel industries?

There’s more, but you get the idea. Germany has gone as far as it can go in ignoring markets, and now has to build 10 coal plants as its penance. Britain has gone as far as it can go in substituting ministers for markets, and now can keep the lights on only by guaranteeing a foreign firm the right to charge perpetually rising electricity rates if it will only build a nuclear plant in the United Kingdom. If the history of energy policy here and abroad teaches anything, it is that smarter policies are not within the grasp of the political class. Better to rely on efficient pricing, which means a carbon tax that puts the burden of energy use where it belongs, on the people and industries using it.

The National Climate Assessment makes it clear that unless conservatives offer a market-based alternative, we will get more government control. Yes, some regulations have succeeded in reducing pollution. But too often at the enormous cost of denying consumers freedom of choice, and of wasting billions we can no longer afford on solutions that cost multiples of price-based solutions that produce more efficient results. 

So now is the time. But not for extending the costly mass of regulations the president has been weaving around the fossil-fuel industries and American consumers, which he intends to do to limit fracking, the transport of oil by train (it seems no Keystone pipeline is available), natural gas drilling, and production from existing coal plants. Do not mock when the president says he has a pen and he will use it. Instead, we should begin thinking about where we want energy policy to go after the November elections. Fortunately, it just may be that the pressures and opportunities to develop and implement a sensible policy are coming together.

Funds are scarcer, reducing the affordability of continued subsidies of a variety of uneconomic green projects and increasing the attractiveness of new sources of revenue.

China, its cities so choked with horrible air that expats are demanding premiums to work there, seems willing to discuss a deal on global taxation of emissions; more and more companies are toying with pricing-in carbon, treating emissions as a risk factor either because of shareholder pressure or for fear of making investments that will prove uneconomic when the next regulation hits the books.

This presents an opportunity to rid ourselves of the numerous distortions created by the subsidies and regulations that clutter the road to the more rapid economic growth that would propel the rate of development and introduction of newer, less environmentally intrusive equipment. And to reduce the intrusion of government into our daily lives. And to generate revenue that can be used for deficit reduction, to scupper the regressive payroll tax on work, for social programs, the military, or for whatever purpose leaps to the fertile minds of our politicians. 

It would be Panglossian to argue that this can be accomplished all at once by a carbon tax. But the layering of new errors on the policy mistakes of the past several decades surely can be slowed and perhaps prevented if the opposition sets out a principled case for more growth and less government, strengthened market forces, taxes on bad stuff rather than on work and investment. If there’s a better, realistic way of achieving those goals than a carbon tax, let’s hear it.

Irwin M. Stelzer, a contributing editor to The Weekly Standard, is director of economic policy studies at the Hudson Institute and a columnist for the Sunday Times (London).

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