Problems with the carbon tax

This is not a partisan column. I am not trying to promote the Republican Party, nor do I have anything against the environmental movement. Indeed, I like to think of myself as an environmentalist. Nevertheless, I believe that those who promote the carbon tax (almost all of whom are in the Democratic Party) do not fully understand the adverse impact that it could have on American competitiveness.

Recently, Representative John Dingell (D-MI), who is once again the chairman of the House Energy & Commerce Committee, suggested that Congress seriously consider the imposition of a carbon tax. He argued that it would serve as a way of both reducing carbon emissions and of promoting wind, biofuels, solar, and geothermal energy usage.

This grew out of testimony delivered by former Vice President Al Gore to Dingell’s Energy and Commerce Committee earlier this year, when Gore argued: “We should start using the tax code to reduce taxes on employment and production, and make up the difference with pollution taxes, principally [on] CO2…. Right now we are discouraging work and encouraging the destruction of the planet’s habitability.”

At first blush, this new tax scheme seems quite attractive. Fuel is saved. Pollution is reduced. New, exciting energy sources are encouraged, perhaps even subsidized. It all seems pain-free, and best of all it rewards virtuous behavior. Theoretically, it might even be used to reduce taxes on products manufactured by “green” methods.

Unfortunately, there is no easy, pain-free way to achieve this brave new world, although there are a few sensible steps that should be taken. It would make sense to raise taxes on gasoline consumption, and we can trust that CAF⊃ (Corporate Average Fuel Economy) standards are going to be raised significantly over the next 20 years. In these cases technology may even make the taxes and regulation comparatively painless (as engineering innovations and more precise and flexible machine tools have allowed us to double gasoline mileage over the past three decades).

But beyond these simple steps, those who advocate a carbon tax on industrial production have not come to terms with how this would adversely affect U.S. industrial competitiveness. There are many industries that have thrived in the United States as a result of our inexpensive energy resources. The aluminum industry and the steel industry are prime examples. Better yet, look what has happened to the chemical industry in this country when the cost of natural gas went from the cheapest in the world to the most expensive, almost a direct result, incidentally, of laws passed by Congress that favored natural gas use by utilities in order to cut down on pollution.

Regulation and taxation have profound consequences. Our air is cleaner, but many industries have been pushed offshore as a result. To listen to Al Gore, one would think that the greening of America is a great way to create new jobs in environmentally-friendly industries. We will become the pollution reduction teachers and suppliers to the world. The great economist Joseph Schumpeter talked about “creative destruction,” as new industries replace old, benefiting the overall economy.

That sounds great in the abstract. But the core constituencies of the Democratic Party, including the United Auto Workers, the United Mine Workers, and many other industrial unions whose jobs could be driven to India or China, might not have such a sanguine attitude if they thoroughly analyzed the consequences of the U.S. government unilaterally increasing the cost of carbon-based fuels in any significant way. If the carbon tax defenders argue that the increase need not be dramatic, the question would arise of how much behavior modification would result from a modest increase. If you want to affect behavior, you have to change the costs and the incentivesdramatically.

No matter what you may hear, there is no such thing as a free carbon tax lunch. Chairman Dingell and his colleagues should think long and hard, including listening to the affected industries and their workers, before they act legislatively. The carbon tax may sound attractive, but it has many unintended consequences – not the least of which would be to drive more American industries and jobs overseas.

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