March 23, 2015

New Study: The Conservative Case for a Carbon Tax

Today, the Niskanen Center released a study I wrote arguing that Congressional Republicans should put forward a carbon tax and conservatives should throw themselves into getting it passed. Better to let market actors decide (in response to price signals) where, when, and how greenhouse gas emissions are controlled than have government bureaucrats do the same via regulation. The carbon tax bill I have in mind would:

  • Levy the carbon taxes at the point of production;
  • Use tax proceeds to offset revenue losses from tax cuts so as to ensure revenue neutrality;
  • Impose charges on imported goods the equivalent of what they would have had to pay had the imported goods been produced in the United States;
  • Rebate some portion of the tax to poor households to mitigate against the regressively of the tax;
  • Eliminate EPA’s regulatory authority over greenhouse gas emissions;
  • Eliminate green energy subsidies and tax preferences;
  • Eliminate energy efficiency standards;
  • Repeal the Corporate Average Fuel Economy Standards (CAFE); and
  • Preempt state renewable energy portfolio standards.

Many conservatives, like my friend Jeffrey Miron, have argued that no matter how compelling the case for a carbon tax might be, it will be rendered intolerable by the time it emerges from the legislature. Politics, not economics, will dictate the tax rate. Exceptions and favors for politically popular industries will litter the code. And despite promises to the contrary, the inefficient regulations will never die.

Economist Tom Tietenberg of Colby College examined the literature pertaining to the 15 major pollution tax and fee programs instituted worldwide and found that while concerns about the translating of economic theory into political practice are not baseless, they are overstated.

The cost savings from moving to these market-based measures are considerable, but less than would have been achieved if the final outcome were fully cost-effective. In other words while both taxes and emissions trading are fully cost effective in principle, in practice they fall somewhat short of that ideal in part because actual designs, fashioned in the crucible of politics, deviate from the dictates of optimality.

Harvard economist Robert Stavins’ review of the literature tracks Tietenberg’s.

The performance to date of market-based instruments for environmental protection provides valuable evidence for environmentalists and others that market based instruments can achieve major cost savings while accomplishing their environmental objectives.

Conservatives fear that carbon taxes will prove irresistible to politicians in search of revenue and that they will rise far beyond what is merited by the science. But conservatives have less reason to fear runaway taxation than they have to fear runaway regulation. It is more difficult to increase taxes than to increase regulation because the former imposes politically visible costs while the latter imposes politically invisible costs. Public opposition to tax increases—and corresponding support for increased regulation—is well known.

Conservatives are right to fear that special interests will attempt to carve out exemptions to the tax. But those rent-seeking operations could be frustrated to a large extent if the carbon tax were imposed at the point of production. It would be quite difficult for political actors to provide exemptions to favored consumers from taxes already paid upstream.

In any event, regulatory rent seeking is an omnipresent phenomenon that is inescapable in a modern democracy. Preemptively saying “no” to policy reforms that might invite special interests to seek regulatory or tax favors is to preemptively say “no” to government. Given that conservatives are not anarchists, this objection should not deter reformers from exploring positive policy reforms.

Conservatives can support positive, well-executed policy reform and oppose poorly executed, counterproductive policy reform at the same time. The proposition that the former is impossible to imagine and the latter is inevitable is belied by experience. If an otherwise positive policy reform agenda were to degrade in the course of moving through the legislature, conservatives can withdrawal their support.

Perhaps the most often heard conservative objection to a carbon tax in lieu of command-and-control regulation—at least among Washington insiders—is that the entire political exercise is doomed to failure. Environmentalists, they say, would never agree to the sort of plan envisioned here. In the course of failing, conservatives will undermine legislative opposition to naked carbon taxes and other regulatory interventions to address climate change. The cost of a failed policy offensive will put conservative politicians on a slippery political slope that they will be unable to successfully navigate.

Although slippery slope concerns should be taken seriously, they are not compelling in this case. UCLA law professor Eugene Volokh offers three criteria for determining when one might be on the sort of slippery slope envisioned here. He finds that the slope will be most slippery when:

  • People think that they lack enough information to independently assess an issue;
  • People don’t already feel strongly about the topic; and
  • People take a pragmatic rather than ideological stance on the matter.

None of those characteristics describe congressional opponents of carbon taxes (or other consumption taxes). Nor do they describe the climate skeptics in the conservative movement. But those are the two groups that conservatives worry about losing in the advent of a failed attempt at policy reform. As long as anti-tax conservatives can rally a filibuster in the Senate, there is little chance that this nightmare scenario will come to pass. It is hard to imagine such a total collapse in the conservative position from a failed carbon tax deal.

If the slippery slope argument employed by conservatives is taken at face value, any effort at finding compromise—in any policy arena—risks undermining the conservative position. This road, however, leads to legislative paralysis. Any attempt to pass legislation requires some degree of compromise with the opposition, and compromises demand concessions. There will never be enough conservative votes to steamroll the opposition.

Even if you don’t believe that climate change is a problem worth addressing, you should still embrace something like the plan I outlined in my study. As my friend and Niskanen Center advisory board member John Cochrane says to those who believe doing anything about climate change is a waste of money, “Look, if we’re going to waste money, let’s minimize the damage.”

Read the full study here.