Republicans propose a carbon tax

Last week, several prominent Republicans pitched a carbon tax to the Trump administration. The plan has four pillars, meant to make the idea more palatable to conservatives

First, the federal government would impose a gradually increasing tax on carbon dioxide emissions. . . Second, the proceeds would be returned to the American people on an equal basis via quarterly dividend checks. . . Third, American companies exporting to countries without comparable carbon pricing would receive rebates on the carbon taxes they’ve paid on those products, while imports from such countries would face fees on the carbon content of their products. . . Finally, regulations made unnecessary by the carbon tax would be eliminated, including an outright repeal of the Clean Power Plan.

Of course, this proposal is a nonstarter if you don’t believe in climate change or that humans contribute to it. But if you do—even if you doubt the dire predictions of the magnitude of that change made by many climate activists—there are several things to like about this proposal.

First, a carbon tax is a more free-market solution to the problem than any of the alternatives. Addressing climate change correctly is no small feat. The optimum level of emissions is not zero (it basically never is). Instead, the optimum level will reduce emissions to the point where the marginal benefit of additional emissions equals the marginal cost. In the best circumstances, marshalling all the information required is near impossible.

A cap-and-trade system, for instance, depends on the government correctly valuing the environmental impact of an additional ton of emissions. The government must also correctly determine the marginal benefit of an additional ton of carbon. Since carbon emissions result from essentially everything, this would require the government to constantly know the value of additional production in every industry. And since the economy is constantly changing, this calculations will have to be constantly redone.

A command-and-control approach, like the Clean Power Plan, further requires the government to know all of the available emissions control technologies, their costs, and their benefits. With this information, the government must impose the technology that will reduce emissions to the point where marginal costs equal marginal benefits and no further.

This should call to mind Hayek’s criticism of socialism in The Fatal Conceit. He explained that socialism cannot work because it requires an impossible level of knowledge among government officials. So too with cap-and-trade and command-and-control.

Although a carbon tax does not completely avoid the knowledge problem, its virtue is that it requires far less knowledge. All one need to figure out is the value of the harm caused by an additional ton of emissions. That should be the amount of the tax. Then the market will respond to this price signal by reducing emissions to the socially optimum level.

Another laudable aspect of the Republican proposal is that it does not use climate change as an excuse to grow government. A significant obstacle to getting conservative or libertarian support for climate policy is that, because climate activists are mostly of the left, proposals tend to depend on vast increases in the size of government. Just last year, environmental groups successfully opposed a carbon tax proposal in Washington because it was designed to be revenue neutral. It seems the groups thought addressing climate change wasn’t worth it if the result wouldn’t be a huge slush fund to be distributed to cronies and left-wing causes.

The Republican proposal too is designed to be revenue neutral, returning the proceeds of the tax to Americans on a pro rata basis.  And it would reduce the size of government by eliminating the command-and-control regulations that the federal government has adopted to address climate change. Such an approach should appeal to libertarians. A carbon tax could reduce a harmful externality, which could harm people and property, while minimizing the growth of government.

The Republican proposal won’t likely get anywhere soon. But it’s a beacon for conservatives, libertarians, and environmentalists concerned about the issue to all come to the table. That’s a reason for hope.

P.S. In a future post, I hope to add some additional thoughts about how a carbon tax could better promote liberty and protect property.

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