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Let’s Tax Carbon

Irwin M. Stelzer

Having lived through and survived Richard Nixon’s promise of energy independence, Jimmy Carter’s effort to substitute a hair shirt and a woolly sweater for a thermostat set at comfortable levels, George W. Bush’s insistence that Americans surrender their incandescent light bulbs, other presidents’ support for subsidies for ethanol and nuclear power, and the current administration’s plan to substitute subsidized wind and sun for fossil fuels, I thought I had seen it all—every technique imaginable for interfering with free markets and consumer choice. I was wrong.

Now we have the Third National Climate Assessment, making the case for further intervention by our government, and every other government for that matter, in the energy markets. The assessment comes in at a thumping 829 pages, succinctly summarized in a 137-page “Highlights” section, and concludes that the globe is warming—and freezing; we are experiencing more severe droughts—and floods; our forests, many of them “within urban areas,” are being destroyed; our winter storms are more severe; “Native Peoples’ access to traditional foods and adequate water” is threatened. If you experience weather of any sort, an experience hard to avoid, it is sure to change. You are experiencing climate change. It’s happening “right now,” not in some far-off future, says the president.

There’s no mention of slaying of the first born, lest the authors be accused of plagiarizing from the Passover Haggadah’s nasty plagues (bugs, hail, locusts, et al.) visited by God on the Egyptians who mistreated the Israelites. But that’s all that’s left out of the parade of horribles.

Supporters of both the 300 experts and 60-member federal advisory committee that produced the assessment like to claim that the science is “settled,” which commentator Charles Krauthammer has pointed out science never can be (witness Copernicus, Galileo, and Einstein, among other unsettlers of “settled” issues). Anyone who questions the models and conclusions of what the president calls “the 97 percent of scientists” (I think he meant to say “97 percent of reporters”) is a “denier,” a disgusting echo of the term usually reserved for the anti-Semites who deny the Holocaust. Although the assessment refers to evidence that “tells an unambiguous story” of climate disaster and disrupted lives, it concedes, “There has been no universal trend in the overall extent of drought in the continental U.S. since 1900 .  .  . [and] trends in severe storms, including the intensity and frequency of tornadoes, hail, and damaging thunderstorm winds, are uncertain and are being studied intensely,” a conclusion essential lest the continued flow of grant money to the assessors and advisers dry up along with large sections of the country.

Fortunately, there is little prospect that the call to arms will be heard: Polls show that climate change is low on Americans’ list of worries. But that does not mean the assessment will prove harmless, for it lays the basis for a more complete takeover of energy industries by a president who knows how to deploy the regulatory process to impose his vision on the country, to “transform” it, as he promised even before winning his first presidential election.

The president is fortunate in his opposition, which specializes in doing just that—opposing—but only that. Republicans and many of their conservative allies quite rightly question the science underlying the claims of the president but offer no alternatives to his call for more and more regulations on the production and consumption of energy. One is available, and should not be hastily rejected: a carbon tax.

Conservatives can maintain their skepticism about global climate change, but that does not mean that a bit of prudential action might not be appropriate should it turn out that carbon emissions are indeed having a negative effect on climate. A carbon tax would allow for rebating a portion of the regressive payroll taxes that are job-killers, while further reducing our still-heavy dependence on oil imported from countries that don’t like us, and providing a market-based substitute for costly subsidies and regulations that are piece-by-piece turning the energy sector over to government control. They say that in politics you can’t beat something with nothing, which is what Republicans and conservatives have been doing when it comes to energy policy.

Meanwhile, self-styled progressives, some of them very smart indeed, think they can successfully intervene in energy markets without imposing huge costs on consumers and on industries, and that such intervention is the only route to a cleaner, more efficient energy economy. They’re delusional. In Germany, the decision to shut down nuclear plants and rely on wind and solar has produced a massive increase in energy costs, so politically indefensible that Germany now has 10 coal plants under construction in an effort to prevent its poorer citizens from suffering in the winter and its energy-intensive industries from fleeing to more hospitable climes, including natural-gas-rich America. Worse: The coal these plants will burn is the dirtiest version of the stuff that can be found. In Britain, the government’s decision to make a gesture—one that can have no possible effect on global greenhouse gas emissions—by ordering a massive cut in that nation’s emissions has made it 63 percent more expensive to heat a home and driven 25 percent of households into what is called “energy poverty”—spending more than 10 percent of their disposable income on energy. Not to mention scarring the beautiful countryside with unwanted wind machines that are slaughtering birds and interfering with the military’s radar installations. In this country, hard-working Joe-the-plumbers, driving unsubsidized pickups, are paying taxes that help finance the purchase of $80,000 Tesla all-electric automobiles by Hollywood moguls and other high-earning greens and energy bills swollen by all sorts of regulations the cost/benefit justification for which the EPA refuses to reveal. With more bills to come: A few weeks ago the Department of Energy’s experts, hot off their Solyndra success, pledged up to $47 million to each of three offshore wind projects. Even the green-friendly New York Times noted that “an Energy Department grant to develop a new technology can be helpful but is certainly no guarantee of success.” No surprise there.

In short, costs are rising, the poor are suffering the most in our country and elsewhere, all because government bureaucrats refuse to return the allocation of energy resources to the markets. The bureaucrats believe that they can accomplish what some of the hardest-headed (in the better sense of those words) investors the nation has ever seen cannot: predict how energy markets will react to new developments, including regulations. Legendary hedge fund operators, deal-makers, and Masters of the Universe were so certain that natural gas prices would rise and stay elevated, generating huge profits for lower-cost coal-based power, that they bet billions on the acquisition of a Texas utility, TXU, that is now bust. Along came fracking, moving the natural-gas supply curve in an unanticipated direction, and making electricity generated by the utility’s coal plants uncompetitive with natural gas in electricity markets. At least the taxpayer will not pick up the tab for this misadventure, although it is never wise to underestimate the inventiveness of these deal-makers, who have already announced that they will need some complicated favors from the IRS and from regulators to pull off their bankruptcy plan. If the smartest guys in the room, with an enormous personal incentive to get their forecasts of energy markets right, can’t succeed, how can we expect bureaucrats, with only taxpayers’ skin in the game, to shape efficient, fair energy markets?

Consider the road not taken by our political dabblers in energy policy: Let the market decide who uses energy, and how much, and how it is supplied. But not the market as it is now structured, for it is rife with what economists call market failure—the sending of price signals to consumers and producers that do not reflect the true cost of producing and using energy. One set of distortions makes some forms of energy seem more costly than they are by imposing inefficient regulations on them, driving up costs and prices. Just load regulations on coal producers and generators who burn it, then more regulations, and sooner or later they will give up the one-sided game and put what is left of their capital to more profitable uses. Another set makes some energy sources seem less costly than they are by using taxpayer money to subsidize their production, as is the case with nuclear power, wind, and solar. Set standards for automobile fuel efficiency that make safe, comfortable cars unaffordable for lower-income buyers, who end up with less car than they would have had thanks to policies imposed by politicians, many representing big-city constituents who can walk to the nearest Whole Foods and who use taxpayer-subsidized public transit to get to work.

Suppose, instead, policymakers say to consumers: Consume all the energy you want, in whatever form. But pay the full cost that you impose on society by so doing. Buy your Tesla electric car, but don’t expect taxpayers to bear part of the cost or provide you with roads to which you do not contribute because you use no gasoline. Keep your thermostat at 60 degrees in the summer and 80 in the winter, but don’t expect to get taxpayers to help out with your utility bills.

And to producers: Generate electricity any safe way you find most efficient, but don’t look only to your narrow-visioned accountants to calculate the cost of what you are doing. Factor in the cost of carbon emissions when you plan future investments in order to account for the risks to the value of those investments from costly future regulations. Some companies, among them ExxonMobil, have started to do just that. A carbon tax would enable you to do that, without worrying that your competitors might not be so forward-looking. Are you pleased with the current system of regulation that will reduce the coal industry to a shadow of its former self, stall or perhaps in the end prevent oil flowing to us from Canada to displace stuff from unstable, hostile countries, or would you prefer to pay for what you do to the environment in exchange for a removal or reduction of uneconomic regulations? Do you really think you can provide the mining and refining capacity the country needs, and the associated infrastructure under the current system, or would you rather offer a trade—carbon taxes for less stringent regulation on new investments, and perhaps lower corporate taxes?

To those who blanch at the thought of any tax, not least a carbon tax, I ask: What is your plan when it becomes clear that we can’t finance an adequate military from current revenues? Worried about Chinese expansion at the expense of America’s allies? A resurgent Russia that has its eyes on the territory of some of our NATO allies? Beefing up our southern borders so that we can proceed with immigration reform without triggering a new wave of illegal entry? Larger deficits? Then you will need money. Would you prefer higher income taxes? Increased wealth taxes? Or a tax that merely incorporates the social cost of carbon consumption into its price, so that the polluter pays and consumers see real prices when they decide between consuming and abstaining from consumption of carbon-heavy products?

Should we favor policies that will certainly make our enormous coal resources less available, or policies that force producers and consumers to pay for any damage coal usage does to the environment, with only such reduction in consumption as might result from the free exercise of consumer choice? Should taxpayers continue to subsidize renewables so that once fossil-fuel facilities have been decimated we will be left with the unpalatable choice of continuing such subsidies indefinitely or doing without the energy provided by the departed fossil-fuel industries?

There’s more, but you get the idea. Germany has gone as far as it can go in ignoring markets, and now has to build 10 coal plants as its penance. Britain has gone as far as it can go in substituting ministers for markets, and now can keep the lights on only by guaranteeing a foreign firm the right to charge perpetually rising electricity rates if it will only build a nuclear plant in the United Kingdom. If the history of energy policy here and abroad teaches anything, it is that smarter policies are not within the grasp of the political class. Better to rely on efficient pricing, which means a carbon tax that puts the burden of energy use where it belongs, on the people and industries using it.

The National Climate Assessment makes it clear that unless conservatives offer a market-based alternative, we will get more government control. Yes, some regulations have succeeded in reducing pollution. But too often at the enormous cost of denying consumers freedom of choice, and of wasting billions we can no longer afford on solutions that cost multiples of price-based solutions that produce more efficient results.

So now is the time. But not for extending the costly mass of regulations the president has been weaving around the fossil-fuel industries and American consumers, which he intends to do to limit fracking, the transport of oil by train (it seems no Keystone pipeline is available), natural gas drilling, and production from existing coal plants. Do not mock when the president says he has a pen and he will use it. Instead, we should begin thinking about where we want energy policy to go after the November elections. Fortunately, it just may be that the pressures and opportunities to develop and implement a sensible policy are coming together.

Funds are scarcer, reducing the affordability of continued subsidies of a variety of uneconomic green projects and increasing the attractiveness of new sources of revenue.

China, its cities so choked with horrible air that expats are demanding premiums to work there, seems willing to discuss a deal on global taxation of emissions; more and more companies are toying with pricing-in carbon, treating emissions as a risk factor either because of shareholder pressure or for fear of making investments that will prove uneconomic when the next regulation hits the books.

This presents an opportunity to rid ourselves of the numerous distortions created by the subsidies and regulations that clutter the road to the more rapid economic growth that would propel the rate of development and introduction of newer, less environmentally intrusive equipment. And to reduce the intrusion of government into our daily lives. And to generate revenue that can be used for deficit reduction, to scupper the regressive payroll tax on work, for social programs, the military, or for whatever purpose leaps to the fertile minds of our politicians.

It would be Panglossian to argue that this can be accomplished all at once by a carbon tax. But the layering of new errors on the policy mistakes of the past several decades surely can be slowed and perhaps prevented if the opposition sets out a principled case for more growth and less government, strengthened market forces, taxes on bad stuff rather than on work and investment. If there’s a better, realistic way of achieving those goals than a carbon tax, let’s hear it.

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