The Case for an Energy Tax

by Charles Wheelan, Ph.D.

Posted on Monday, December 14, 2009, 12:00AM
I do a fair amount of public radio. It's usually a staid, polite conversation among the guests, even when there are sharp disagreements.But a few weeks ago, I nearly leaped across the table and went after one of my fellow guests.



Fortunately I resisted the urge (barely) and the segment ended without a brawl. (The brawl would have been awkward since there are no commercial breaks, and it's not obvious what the host would have done.)Why did I contemplate this escalation? The program host was discussing the cap and trade legislation currently being considered by Congress, and my fellow panelist asserted emphatically that Congress should not do anything that would raise the cost of carbon emissions because "it would be bad for the economy."Those are not normally considered to be fighting words. The statement was relatively banal and, without much scrutiny, could easily pass as common sense. What made me so angry? The guest's opinion -- the notion that anything with short-term adverse economic effects must be bad public policy -- is the epitome of everything wrong with our current political discourse. It suggests that Congress should avoid doing anything with short-term costs, even when the long-term benefits are potentially huge. That's dangerously wrong. To explain why, let me make some comparisons to other aspects of life:Medicine: "I'm not going to let my daughter have chemotherapy to treat her leukemia. That will make her feel nauseous, and she'll lose her hair."Education: "We're not going to save for college. Then we won't be able to go out to dinner as often."Business: "We can't build a new plant to expand production. That would lower our profits this quarter."Health: "I'm not going to exercise. It makes me tired and sweaty."Military: "I'm not going to storm that beach. People will shoot at me."The Current Financial Crisis: "Why should I borrow less? Then I won't be able to afford this big house."As in the rest of life, everything worth doing in public policy -- all of the investments that have enabled us to build a great nation and all of the things we must do in the future -- involves some sacrifice in the present. This is now the case with carbon emissions.All reasonable evidence suggests that climate change poses serious, long-term harm. Any solution must involve raising the cost of carbon emissions, either through a carbon tax, or through cap and trade legislation (which does the same thing in a more roundabout, less transparent way). The economics are quite simple: If you want to discourage some activity, make it more expensive. We know that people use less energy when prices go up. Did you see what happened when gas went to $4 a gallon last year?Enough Sloppy ThinkingIf you're not persuaded by the fusillade of evidence on climate change, a carbon tax is still a good idea because it's a "better" tax than the alternatives, which discourage productive activities like working, saving, or investing. Taxing carbon discourages traffic congestion, it ameliorates more traditional air pollution, and it helps to wean us from nasty foreign oil producers. Even the notion that a carbon tax would be bad for the economy in the short run is debatable. I have argued repeatedly (including as part of a Congressional campaign) that any tax on carbon-based fuels or CO2 emissions should be at least partially offset by cuts in the income tax or the payroll tax. Or we could simply use the carbon tax revenues to give a lump-sum rebate to all American households. In that case, households whose carbon emissions were lower than average would come out ahead; their rebate would be larger than what they would pay as the result of the new carbon tax. Households with a larger-than-average carbon footprint -- meaning that they are imposing disproportionate harm on the rest of us -- would end up worse off; their carbon tax bill would be larger than their rebate. This does not strike me as one of the great social injustices of the 21st century.The cuts in the income or payroll tax (or the rebate to households) would help to offset the economic impact of higher energy costs. And with advance notice, households and businesses could minimize the impact of a carbon tax by investing in conservation and non-carbon-based energy sources. That's the kind of tax avoidance we like.Given the current deep recession, we could even introduce the income or payroll tax cuts now and then phase in the carbon tax in a year or two, after the economy has recovered. We would get a stimulus in the present while guaranteeing higher government revenues in the future (to begin paying down our staggering national debt). The phase-in would also give firms and families time to prepare for the rising cost of non-renewable, carbon-based fuels.There is a lot to discuss about a more sensible energy policy beyond "it would be bad for the economy." As someone who has spent a lifetime in public policy, I have a lot of tolerance for disagreement. That's what informed, thoughtful people do, and we're better for it.But I have virtually no tolerance for what I would describe as sloppy thinking.

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