Carbon Taxes: The Levy (Some) Conservatives Love

You know the Washington Rule: Liberals will never support spending cuts and conservatives will never back tax increases. Yet, there is one new levy that at least some on the right do support—a carbon tax.

Backing for this idea has popped up in some interesting places. Most recently, the American Enterprise Institute included it in a deficit reduction plan it prepared for the Peterson Foundation. In recent years, conservative luminaries such as columnist George Will and economist Art Laffer have also talked up the idea.

I am by no means suggesting a carbon tax would be an easy sell, especially given the checkered political history of energy taxes. But, in contrast to other tax increases, this one has sprouted a few green shoots on the conservative side of the fence.

First, the history: Back in 1993, President Clinton proposed a broad-based energy tax (called a BTU tax since it taxed energy content measured in British Thermal Units). The proposal barely passed the House despite unanimous Republican opposition. Then it died in the Senate.  That vote spawned a new Washington verb: To be BTU’d. This describes the unfortunate lawmaker forced to vote for an unpopular bill that has no chance of becoming law—sort of the 1993 version of those House Republicans who voted to end Medicare as we know it.

Having been burned by energy taxes, Democrats (except for Al Gore) abandoned the issue for a political generation. But in 2008, GOP presidential candidate John McCain embraced cap-and-trade, a carbon reduction design that operates much like an energy tax. While candidate Obama was decidedly cool to this solution to global warming, he did embrace it after his election. Republicans immediately responded by flatly rejecting cap and trade (GOP presidential hopeful Tim Pawlenty, who supported the idea before it became politically incorrect, has since apologized for his error).  

Most economists figure a tax is a simpler and more-straightforward way to reduce carbon emissions than cap-and-trade. But until recently, at least, cap-and-trade was considered  more politically palatable because it was not labeled a tax.         

Despite the political landmines, a carbon tax makes good economic sense. The argument is fairly simple: By polluting the atmosphere and contributing to climate change carbon emissions impose a cost on society. The users of fossil fuels pay nothing towards that cost, but a carbon tax would build some of those costs into the price of oil, gas, and coal. As a result, users would choose to pay the full price or change behavior. On June 1, AEI sponsored an interesting panel that described this quite well.

Many supporters of a carbon tax would offset the added revenue by cutting other taxes. Rep. John Larson (D-CT), for instance, would reduce payroll taxes. AEI, however, would repeal energy credits for both fossil and alternative fuels and, at the same time, impose a new tax on carbon.  

Btw, the carbon tax issue isn’t just heating up in the US. In the UK, Tory Prime Minister David Cameron favors such as tax, and in Australia, former conservative prime minister Malcolm Fraser has thrown his support behind a carbon tax proposed by the current liberal government. It may be more newsworthy, but less important, that actress Cate Blanchett also backs the levy.

Will Republicans suddenly embrace a carbon tax? That’s no more likely than Democrats calling for cuts in Medicare and Social Security. But eventually, Washington will come up with a serious, bipartisan deficit reduction plan that will include both major tax increases and spending reductions. When that day comes, don’t be too surprised if a carbon tax finds its way into the deal.  After all, as University of Maryland environmental economist Roberton Williams reminds us, if we are going to raise taxes, we may as well address climate issues while we are at it.