Cap’n Trade: Don’t Cut the Gas Tax, Raise It—A Lot

By :: May 6th, 2008

Before you get the idea that a big increase in energy taxes is just the latest raving of an elitist, inside-the-Beltway policy wonk, you might want to know that I’m not the only one who likes this idea. So do John McCain, Hillary Clinton, and Barack Obama.

Yup, its true. McCain and Clinton would cut the gas tax before they’d raise it. Obama is, at least, more consistent. He’d raise energy taxes, through a windfall profits tax on oil companies, before he’d raise them some more.

All three candidates have endorsed what has become known as a “cap and trade” energy policy. Now, Cap’n Trade may sound like the name of a second-rate seafood restaurant. But it is really just Washington-speak for “really big energy tax increase.”

Cap’n Trade would work like this. The government would require companies to obtain permits that give them the right to emit a fixed amount of greenhouse gasses. The limit on emissions (the cap) would be gradually ratcheted down over the years until the overall amount of schmutz reached some agreed-upon level. A relatively clean company could sell (trade) its unused rights to pollute to a dirtier company.

Theere are basically two versions. The government could auction those mandatory licenses, a process which would look an awful lot like a tax. CBO figures that government revenues from these mandatory emissions permits would range between $50 billion and $300 billion annually. That money would not come from thin air (clean or not). It would be paid by consumers in the form of higher prices.

Or, Washington could give the permits away based on prior energy use, which would generate a massive corporate windfall. But the impact on consumers would be the same: The mandated reduction in supplies of fossil fuel would drive up prices, which would be passed through in the form of higher costs for gasoline, home heating oil and anything else made from oil, coal, or natural gas. The only difference is energy producers would get to keep the money.

Obama and Clinton like the auction. McCain has not said which version he favors.

Now, don’t get me wrong. Raising taxes on energy is the surest way to reduce demand, which in the long run may make for both a cleaner environment and lower energy prices. We can argue about whether Cap’n Trade or a direct carbon tax is a better idea, but that is for another day.

The point is that McCain, Clinton, and Obama all favor big hikes in the prices consumers pay for fossil fuels, including gasoline. Since these increases would dwarf the gas tax dollars they have been arguing about for the past couple of weeks, it might not be a bad idea if we started to pay more attention to the ol’ cap’n than to the pros and cons of a temporary gas tax holiday.