October 1, 2018

Why Republicans Should Lead on Carbon Pricing: A Response to Steve Forbes



In July, Representative Carlos Curbelo introduced the Market Choice Act (MCA), which would replace the federal gas tax as the main revenue source for highway infrastructure spending with a carbon tax.The proposed carbon tax would raise more revenue than today’s gas tax, while also reducing annual greenhouse gas emissions more than President Barack Obama’s Clean Power Plan and other potential regulations. Moreover, the MCA institutes a 12-year moratorium on EPA greenhouse gas regulations on power plants and industrial facilities. For its environmental ambition and innovative approach, the bill received praise both from environmental groups and a diverse array of American businesses, including large industrial emitters and fossil fuel companies.

Yet some conservative activists have criticized the MCA, describing it as a costly new tax. One of the most recent high-profile conservative voices of dissent came from Steve Forbes in an op-ed he wrote for The Hill. In the piece Forbes argues that Republican support for the measure betrays explanation, claiming that  it will be costly to consumers, hurt the economy, grant too much authority to the EPA, and open the door for future malfeasance from Democrats. Because Forbes’s arguments are a thorough overview of the reasoning behind conservative opposition to the MCA, they are worth addressing. While he makes some fair points, his critique is also rife with inaccuracies and misunderstandings.

Costly New Tax

Using modeling of the bill from Columbia University, Forbes points out that this new tax will increase gas prices by about 10 cents, even as the federal gas tax is eliminated. While the modeling shows that price increase will fade away over time as demand changes, consumers will pay more for fossil-fuel energy under a carbon tax. Columbia’s modeling indicates that per capita energy spending would increase less than 10 percent by 2030 ($186-278 per capita), which would keep energy expenditures well below their historic highs from a decade ago.

Now, remember that the MCA is offered as a means of increasing federal funding for infrastructure (which is why 70 percent of revenue is dedicated to the highway trust fund). Politicians on both sides of the aisle agree that we need to fix infrastructure and find a permanent revenue source for the highway trust fund. And with rapidly accumulating federal debt, the idea that we may need to raise some new revenue to fund infrastructure is widely accepted.

To meet our infrastructure needs, conservative leaders have already proposed that we increase fuel taxes. Bill Schuster, the retiring Chairman of the House Transportation and Infrastructure Committee recommends that we increase the federal gas tax by 15 cents a gallon. The U.S. Chamber of Commerce has suggested an increase of 25 cents a gallon. Both of these proposals would increase prices at the pump more than the MCA. Instead of simply increasing the gas tax, the MCA replaces it with a tax that has a broader base, larger environmental benefits, and inflation indexing. While Mr. Forbes may not see the merit in that approach, he fails to suggest any method for paying for the infrastructure improvements that leaders on both sides of the aisle agree are necessary.

Economic Disaster

Forbes also argues that the MCA is a new tax that will slow economic growth, and that “this would be a surefire way to severely jeopardize our economic revival. It would crimp the American energy boom and raise energy prices.” While it is true that taxes aren’t free, just how much of a threat the MCA would be to the economic recovery is a question that requires sober analysis.   

The same study that Forbes cites for gas price increases includes estimates of the MCA’s effect on GDP. Over the first 10 years the carbon tax is collected, GDP is reduced by a relatively constant 0.1-0.2 percent. Importantly, the negative effect of the tax doesn’t grow in time. So, while there is a significant, but small cost, the MCA would hardly halt economic growth.

Forbes presents the MCA as a counter to the recent tax cuts, which offer a point of comparison to gauge the prospective effect of the MCA. The same macroeconomic model used by the Columbia-Rice group (the D-Z model) was one of the three used by the Joint Committee on Taxation to evaluate the effects of the recently-passed tax reform. They reported that the tax cuts would increase GDP an average of 0.8 points over 10 years. So the best apples-to-apples comparison that we can make would have the MCA erode less than a quarter of the additional growth from last year’s tax cuts.

Increased energy production is a part of the current economic boom, and the geopolitical implications of the United States becoming a net exporter of energy should not be dismissed. But the MCA, will not, as Mr. Forbes would have it, crimp the energy boom. The energy boom came about because of improvements in development technology, which lowered the costs at which U.S. producers could supply oil and gas to the market. So while there has been a 70 percent increase in domestic oil production since 2010 (and a 30 percent increase in gas production), there has been little or no increase in domestic energy consumption over the last 8 years. The energy boom has mostly led to increased energy exports, which the MCA does not tax.

In contrast, a carbon tax is a demand-side policy that uses prices to let consumers know about the emissions associated with their activities. Some will choose to pay the tax, others will shift to alternatives. Thus the Columbia modeling predicts a shift to cleaner sources of energy (wind, solar, and renewable gas), but similar levels of energy production. The only major change is a further decline in coal burning, which would fall to half of today’s amount by 2030. But coal production has not been, and is not predicted to be, part of America’s energy boom.

Forbes is also concerned with the border adjustments in the MCA, which place import duties on certain goods and rebate the carbon tax for certain exports. Yet claiming that the MCA “would serve as a national sales tax that would automatically increase prices for countless consumer products we use and rely on every day, such as food and clothing,” is simply incorrect. The border adjustment applies to goods that are carbon intensive—meaning that the carbon tax increases cost of their manufacture by more than five percent of the total value of the good produced in the United States. Neither food nor clothing would be subject to a border tax, because they are not carbon intensive goods. Instead the border adjustment would apply to products like iron ore, aluminum, and cement, because producing those products involves a significant amount of greenhouse gas emissions.

Uncontrolled EPA Authority

Forbes also mistakenly says that pricing the emissions from heavy industry amounts to industry targeting, and grants the EPA unprecedented new powers. In fact, if the MCA were to pass, Congress would be exercising its authority to levy taxes, collected by the Treasury, with EPA carrying out a limited and technical ministerial job.

The MCA raises taxes on 20 manufacturing sectors that emit significant amounts of greenhouse gases as a byproduct of their production processes. Only large facilities in sectors with total emissions greater than 250,000 metric tons annually (about what 53,000 cars emit in a year), are subject to the emissions tax. For the 20 sectors named in the bill, such facilities already report their emissions to the EPA. EPA can add new sources of significant greenhouse gas emissions to the tax scheme that are otherwise not specified by this legislation, but only if they meet the significance threshold specified in the Act. Likewise, EPA must remove sources if their emissions decrease below that threshold. To take either of these actions, EPA has to do a rulemaking with all of the attendant comment periods and legal challenges. With such clear, easily measurable, and verifiable conditions, Congress is not giving EPA carte blanche to tax American industry.

A slippery slope

The last concern Forbes brings up is that supporting a carbon tax is opening the door to future malfeasance to liberal congresses and Presidents. The analogy he uses to demonstrate his point—that this bill is akin to homeowners being forced to post notices on their doors and online with instructions for thieves on how to disable their alarm systemsdemonstrates a basic lack of understanding the entire purpose of a carbon tax. Carbon emissions are an externality. A carbon price is the homeowner’s sign saying “either keep out or pay me to come in.” The violation of rights here is being perpetrated by the emitters and it is totally fair that the polluter pays.

That a future Congress might change the tax rates or allocation of revenue from a carbon tax is no more a risk than a future Congress raising any other tax or making any other spending decision. And it is one that the MCA recognizes and answers by asking that a series of trade-offs be made and renegotiated and reauthorized after 10 years. If carbon pricing exceeds our hopes for reducing emissions, Republicans can come back then to carve out further regulatory concessions and reauthorize spending as they see fit. If Congressional priorities change, then the carbon revenue can be devoted to making tax cuts permanent, servicing debt, or other productive ends.

Why?

Forbes concludes with a question addressed to the sponsors of the MCA: “Why would you willingly inflict bigger government, more taxes and higher energy costs on your constituents? Voters in your districts might well be asking the same question come November 6.”

It really should be no mystery as to why these Republicans would stake out a leadership position on carbon pricing. First of all, the near-term costs of doing so are outweighed by long-term benefits from emissions reductions. For a review on how the economic costs of halting greenhouse gas emissions pale in comparison to the economic risks of unabated climate change, see this article from my colleague Jerry Taylor, on the conservative case for a carbon tax. A big part of the conservative case for a carbon tax is that the effectiveness of the tax in reducing emissions gives ample justification to halt EPA regulations, creating business certainty and real regulatory reform, as in the Market Choice Act.

It is also very likely the politically smart thing to do. Two of the co-sponsors represent Southern Florida, where the sea level rise that will come from unmitigated climate change is an existential threat. The other co-sponsor is from a Congressional district where 68 percent of people believe fossil fuel companies should pay a carbon taxa level of support untied to the revenue replacing the gas tax or supporting transportation funding. Staking out a clear, authoritative position early helps position the bill’s supporters as central figures in future policy discussions and, in their case, offers a credible response to climate risks that will reduce regulatory burdens and accomplish more near-term political goals than what has been offered by Democrats. Mr. Forbes should follow their lead.