March 30, 2015

Debating the Carbon Tax



Last week, Robert Murphy, senior economist at the conservative Institute for Energy Research, penned a rebuttal to my study making the conservative case for a carbon tax.  The arguments forwarded by Murphy are frequently offered by conservative energy policy insiders when carbon taxes come up, so they are worth considering carefully.

While I understand Murphy’s concerns, I do not share them. Let’s consider each of his three substantive points in turn.

States cannot be kept from regulating.  Broadly speaking, Murphy is correct. Unless federal policy includes outright prohibition of state regulatory authority, states will always be free to act. Is Murphy right, however, to worry that states would replace discarded EPA regulatory activity with their own brand of the same? I don’t think so.

Lurking within Murphy’s argument is a belief we both share; each state manifests differing political preferences about how aggressively government should tackle the risks associated with climate change. If the federal government falls short of delivering the preferred degree of mitigation, a state will be inclined to undertake its own initiatives to make up for the shortfall.

Hence, I suspect that state political attitudes about a tax-for-regulation swap hinge on how the plan is perceived. If state political leaders think federal policy just got “greener,” they are probably less likely to respond with more regulation. If they believe federal policy just got “browner,” they are more likely to respond with regulation. Given that the plan I sketched out cannot be passed without significant environmental support, it is not obvious to me that states will color the policy reform “brown” and act accordingly.

Now, I understand that Murphy believes that no environmental support for a tax-for-regulation swap is forthcoming, so a negative state environmental response would be inevitable even were that swap somehow–miraculously–to pass. But wouldn’t the same criticism apply to his preferred policy of nakedly rolling back EPA regulations by conservative force? After all, if a state legislature is inclined to replace lost EPA regulations with state versions of the same, wouldn’t they be more likely to do that under Murphy’s proposed policy path than in a scenario in which the regulations are replaced with a carbon tax?

Even if states were to increase regulation as a response to a tax-for-regulation swap, I seriously doubt that they would enact mirror images of the Clean Power Plan, which is, after all, a blueprint for greenhouse gas regulation that states have consistently rejected in favor of cap-and-trade regimes. It is also quite possible that states will respond to a tax-for-regulation swap–if they respond at all–as they often do; by piggy-backing on federal policy (in this case, by adding their own carbon tax on top of the federal carbon tax). Hence, whatever replaces the Clean Power Plan will likely be more market-oriented even if Murphy’s hypothesized state backlash were to follow.

Environmentalists have no real interest in a tax-for-regulation swap. There is no way to prove this argument to be correct or incorrect because it is an exercise in aggregated mind-reading. All we can reasonably do is draw inferences about intent from individual behavior.

For the record, I have no doubt that some environmentalists prefer EPA regulatory authority to a carbon tax. What makes Murphy, however, believe that environmental leaders, on balance, have no interest in a tax-for-regulation swap? He forwards two arguments.

First, he says, environmentalists support inefficient, costly regulation. This, however, tells us nothing about whether they would prefer that regulation to a carbon tax. Plenty of environmentalists argue in public and private that putting an appropriate “price on carbon” is the first-best answer to climate change. But since they see no political path to get there, command-and-control regulations are a second-best alternative. This is a perfectly rational position to hold if you believe that climate change presents as great a risk as some experts (reasonably) think.

Second, he notes that no serious carbon tax proposal yet forwarded is completely revenue neutral, which, Murphy claims, tells us all we need to know about political intent. First of all, he’s incorrect. But even were he correct, that doesn’t necessarily tell us anything about the support that might exist in Democratic ranks for a revenue neutral tax-for-regulation swap. Democrats presumably find no political utility in offering such a plan at present, but why would they? Elected Republicans show little interest in having a carbon tax conversation and, until that changes, why would Democrats publicly negotiate with themselves while getting savaged by conservative attacks?

Regardless, let’s assume that the Morris plan, which Murphy finds wanting (as do I in some respects), is the best that the Democrats can be expected to offer. Isn’t it vastly superior to the status quo? Are we really to reject it because it addresses, for instance, the regressivity of the carbon tax (which conservatives complain about in other contexts)? And doesn’t the fact that the plan comes out of the Brookings Institution suggest that it is potentially salable to Democrats?

Conversations with leading environmentally minded Democrats (including key elected officials in the House and Senate) and environmentalists leaders–not to mention conversations with the corporate community–convince me that there is significant latent support for something along the lines that I propose (the devil, however, is always in the details). Unless one assumes environmentalists are, on the whole, either irrational or unconcerned about environment (a sentiment that is widely embraced on the Right but does not track my experience), there are very good reasons for that support. This is enough to encourage exploring an agreement, particularly given the alternative: the regulatory status quo. If talk proves cheap, nothing is lost.

No piece of legislation can prevent the same or future congresses from undoing the deal and the deal will certainly be undone. The first part of that contention is correct but the latter, while possible, is far from certain. The sustainability of a deal hinges on how much support it has from both sides of the aisle (returning us to the argument above).

Regardless, let’s assume that Murphy is correct and environmentalists try to pass legislation increasing the tax rate or implementing command-and-control regulation after EPA regulatory authority over greenhouse gas emissions is eliminated. Given Republican congressional strength, it’s hard to imagine the prospects for that campaign would be particularly bright, at least over the foreseeable future. Murphy dismisses as “knife-edged political calculations” and “wargame strategizing” the simple observation that passing legislation is very had to do in the face of organized opposition (as any contemporary observer of Congress can easily attest).

In fact, that’s one of the potential sticking points to a deal. Environmentalists (not unreasonably) worry that if the carbon tax proves inadequate (maybe because fewer emissions reductions follow than anticipated, maybe because new scientific information suggests that more aggressive emissions constraints are necessary), they will be forced to go through the legislature to secure additional emission reductions. Passing legislation, however, is very hard. Ratcheting up regulations under preexisting regulatory authority is much easier. This is why Adele Morris suggests suspending EPA regulatory authority rather than eliminating it all together. If projected emissions reductions do not materialize and the Congress cannot be persuaded to increase the carbon tax rate, environmentalists want the option of resurrecting EPA regulation.

It is not unreasonable for Murphy to fear that, once in place, carbon tax revenues will be used to increase government. Proper policy design, however, can make that difficult. For instance, if the tax revenues are used to offset tax cuts elsewhere (say, to pay for corporate income tax cuts) or returned to taxpayers via a lump-sum rebate (as proposed by the Citizens Climate Lobby), diverting revenues for other purposes will trigger significant opposition outside of the Right.

If conservative resolve breaks or if conservative political strength is eroded at the ballot box, then of course, the Left can have their way … which they will have in any case if either of those two events occur.

The nub of the argument Murphy forwards is that conservative should never concede or compromise on anything–in this case, for instance, by green-lighting a carbon tax–because we can’t trust environmentalists not to renege and they will always have the political strength to eventually steamroll conservatives. Now, as noted earlier (and in my paper), I don’t believe a carbon tax is a concession. I believe it to be sound, conservative policy. Regardless, the “never compromise” argument is a recipe for political irrelevance as far as policy change is concerned. It can be useful for political defense but counterproductive for political offense, and I don’t think Murphy is happy with the status quo.

In the course of making these three arguments, Murphy spends a great deal of time playing “gotcha!” on peripheral matters.

  • He’s right that neither Bill Niskanen–nor Jerry Taylor!–supported a carbon tax 17 years ago.
  • He’s almost certainly correct that Murray Rothbard would be hostile to a carbon tax. But that’s neither here nor there to the point I was making; that Rothbard had little patience for conservatives who denied environmental science because they didn’t like its implications. And who doubts that this debate would look far different if conservatives were to acknowledge what the overwhelming weight of the scientific literature tells us about the climate risks associated with greenhouse gas emissions?
  • He’s right that Milton Friedman never endorsed a carbon tax (that I am aware of, anyway). The point I was making, however, is that Friedman agreed that if a pollution problem needed to be addressed, then a tax on emissions is often the best means of addressing it. And this is a very important point.

That is the sum of Murphy’s argument: a tax-for-regulation swap is politically unachievable and, in the course of proving unachievable, will make policy worse. The good news is that he offers no comments or complaints about the economic or policy merits of replacing EPA regulations and green energy subsidies with a carbon tax. The implicit contention seems to be that the policy trade is so good for conservatives that environmentalists would never embrace it (or at least, not embrace it for long). Let’s review the arguments that Murphy chose to either ignore or implicitly concede:

  • I argued that there is no plausible political scenario in which EPA’s authority to regulate greenhouse gas emissions can be overturned by raw conservative political force. Hence, the Right can either accept those regulations as a political reality or propose some politically viable alternative (pages 3-8).
  • I argued that, regardless, conservatives ought to abandon their “just say no” policy towards addressing climate change. Global warming is real, industrial emissions are the main cause, and warming imposes risk that warrant a policy response (pages 11-15).
  • I argued that carbon taxes are a far more efficient means of controlling greenhouse gas emissions than command-and-control regulation (pages 8-10). I further argued that alternative means of addressing climate risks that conservatives might entertain–adaptation, geo-engineering, and maximizing wealth creation now so as to have more resources for a response later–are wanting (pages 22-23).
  • I argued that a carbon tax at the levels presently discussed in Washington would not unduly burden the economy, and that’s particularly true once we consider the (non-climate) environmental benefits that would follow from the tax as well as the benefits of any offsetting tax cuts (pages 15-18 and 20-21).
  • I argued that there is a strong ethical case for reducing greenhouse gas emissions that ought to resonate with conservatives. To wit, one should not harm–or put at risk–the person or property of others and that government should enjoin such assaults on life and property (page 21).

The fact that so much of the case for a tax-for-regulation swap escaped Robert Murphy’s criticism suggests reason for hope.