carbon tax

Natural gas fracking well in Louisiana

Ryan Lizza has a detailed and interesting look at the failure of the United States to pass climate change legislation.  A combination of strategic gaffes (not necessarily by the bill's sponsors), political pressures, external events such as the Gulf oil spill, and the inevitable political backstabbing were contributing factors in the failure of the Kerry-Lieberman-Graham initiative (K.L.G).  The article ("As the World Burns," published in the The New Yorker) can be found here.

Lizza notes that "Obama had served the dessert before the children even promised to eat their spinach" (or as Pink Floyd put it "If you don't eat your meat, you can't have any pudding...")  There were at least a couple of circumstances noted where the Obama administration gave away key multi-billion dollar bargaining chips, for free, undermining the ability for bill sponsors to use these chits to bring supporters aboard. To extend the food analogy one step further than I probably should, K.L.G. was like one of those enormous, all-you-can-eat buffets.  Once the word got out that a good deal was going down, the lines grew quickly, the din louder, and folks became insatiable, piling their plates high with whatever they could get their hands on.

Truth be told, I thought it was a bad bill and wasn't unhappy that it failed.  I prefer knowing there is nothing in place to deal with climate change to the illusion of action.  At least it is harder to pretend the problem has been solved.

K.L.G. fit the illusion category fairly well.  In their effort to make everybody happy, it's sponsors agreed to more and more "compromises."  Quite quickly, the bill turned into a massive pork-laden piece of legislation with real benefits difficult to measure.  It was full of complex language on subsidies and other industry supports that were (often purposefully) difficult to interpret and (as noted by Lizza) sometimes drafted by the beneficiary parties themselves.  With each additional layer of giveaways, the climate benefits became more muted and further delayed in the future.  Subsidies to conventional fuels were large enough to worsen the competitive environment for emerging, lower carbon, approaches. 

Erich Pica at Friends of the Earth put it well when he said of one of the versions of K.L.G:

The bill showers polluting corporations with billions of dollars, but doesn’t require them to reduce pollution fast enough to avoid devastating climate change impacts. And it contains massive carbon offset loopholes that would allow U.S. polluters to keep polluting by paying for often-non-existent pollution reductions overseas. Other loopholes, such as excluding pollution from bioenergy, also undermine the bill’s intent.
These flaws are unacceptable, and they are the result of a defective political system in which polluting corporations, Wall Street traders, and their lobbyists continue to exert far too much influence. Too many senators are siding with special interests instead of advocating solutions that are in the public interest.

But failure on this particular round of climate change legislation doesn't mean the US should do nothing, pretending that the world will right itself and emissions of greenhouse gases don't matter.  The path Congress has been following for decades is to introduce a never-ending cascade of narrowly targeted subsidies. The reason is clear:  they don't have the will to pass neutral, cross-cutting legislation that will directly address the core problem. Despite its "big picture" framing, K.L.G. was not much different.  Though its subsidy provisions, and very large targeted grants of, and exemptions from, carbon credits, K.L.G. simply became a larger version of this old model. 

If using less oil per vehicle mile traveled is important on both energy security and GHG grounds, should Congress really be implementing different rules and incentives for every variant of fuel, drive train, and vehicle class out there?  If we want more low power carbon sources, should Congress be hardwiring energy finance such that the federal government becomes the primary selector of who gets funds, and the taxpayer the de facto risk-taker on all of the large new energy infrastructure?  Clearly not.  The Congressional action needed is to establish a neutral playing field that both forces GHGs into markets, yet does not micromanage which of the hundreds of potential solutions are anointed winner.

Cap-and-trade will likely always be gamed the way it was in Kerry-Lieberman-Graham.  Carbon taxes are not free of political lobbying to be sure.  But the resultant giveaways are far more visible, and therefore carry a larger political risk for beneficiary and Congressional sponsor alike.  Administrately, they are also much easier than permits because a good chunk of the fees can be levied at the base of the economy (e.g., the point of energy extraction), with subsequent usage in hundreds of different industries ignored.  Aside from administrative efficiency, this also means that price signals hit far more sectors of the economy than cap-and-trade would have. 

Yes, I know the reprise.  No new taxes.  Lower taxes.  Zero taxes.  Smaller government.  No government at all. 

So then what?  I don't like taxes either.  But in an effort to avoid any association with taxes, it makes no sense to pass instead all sorts of less-efficient, more corruptible energy legislation and narrowly-targeted subsidies.  That strategy is far more expensive, does little to leverage the power of competitive markets, and has a much smaller chance of actually solving the problem at hand.

There are many ways to avoid the taint of the "T" word.  Simply rebate the taxes in total, preferably by reducing other taxes, so you don't finance more government bloat.  The linkage I like best is to use the proceeds to reduce the fixed costs of hiring people.  Job creation, after all, is a key component of getting out of recession.  The fees on labor, in the form of medicare and social security, are particularly problematic at the lower pay scales, where these fees comprise a substantial portion of a firm's total cost per worker.  Carbon taxes could be productively used to reduce these fees, funding a portion of the FICA and medicare obligations rather than relying entirely on labor taxes.  We could learn from the successes and failures of other places where this has been tried.  Germany, for example, has for some years used taxes on energy to reduce the mandated social security payments into the national pension fund.

For all things carbon tax, a good reference site is the Carbon Tax Center, run by Charles Komanoff and Daniel Rosenblum.