Some economic laws are not political: markets won’t work if prices are distorted. A group of farsighted Republicans is making the case that carbon prices are artificially low, and a big carbon tax would set them right.
In 2017, the bipartisan Climate Leadership Council endorsed a carbon tax that would collect over $200 billion annually, with increasing rates and revenue over time. The group includes older Republican leaders who served Ronald Reagan in high-level positions: James Baker, as Secretary of the Treasury; George Shultz, as Secretary of State; and Martin Feldstein, as Chairman of the Council of Economic Advisers; as well as Janet Yellen and other Democrats. And last week active Republicans, led by Florida Congressman Carlos Curbelo, Republican co-chair of the bipartisan House Climate Solutions Caucus, outlined a significant carbon tax that hasn’t been costed out yet. The tax would likely generate billions in annual federal revenue.
A carbon tax adds a fee to carbon-based fuels such as coal, oil, and gas. Every economist predicts a carbon tax would reduce the use of fossil fuels by raising its price. The market price of carbon is lower than the full price of carbon because other people and future generations who do not enjoy the immediate benefit of using carbon fuel nonetheless pay the cost of released carbon dioxide (CO2) into the atmosphere. Paying the full price of carbon motivates consumers to switch to non-carbon fuels and, most importantly, to reduce energy use.
The chemistry is straightforward. The amount of CO2 released when fossil fuels are burned is proportional to the fuel’s carbon content, which means the carbon tax can be levied on the fuel when extracted or imported.
Bipartisan movement on carbon tax proposals has moved away from the divisive goals of raising revenue toward its core efficiency: to correct market failures. The bipartisan Climate Leadership Council’s proposal aims to be revenue neutral by rebating the tax revenue to households.
Curbelo's proposal may be revenue-positive when it is eventually scored by Congress’s Joint Tax Committee, but he may want the revenue used to replace the federal gasoline tax. The form of the carbon tax is irrelevant; raising the price will correct the market failure of underpriced carbon.
While long-term efficiency matters, so do short-term politics. Curbelo is under electoral pressure in his south Florida district in part because rising sea levels and the Trump Administration’s anti-climate change actions have caused his 2018 poll numbers to fall. Democrats are targeting Curbelo’s district as one of their “red to blue” opportunities.
But House Republicans are divided. The House Republican Party leadership opposed Curbelo on July 19 by voting on a non-binding resolution rejecting carbon taxes. Six Republicans, including conservatives like Curbelo’s Florida colleague Rep. Francis Rooney, bucked their leadership and voted against the resolution.
On the deep blue side of the aisle, progressive Democratic carbon tax proposals go for the gold and would raise revenues to pay for projects and job creation. The progressives aim to boost economic growth, job creation and training for workers who might lose their carbon-based jobs. But although Democratic proposals might use carbon tax revenue in different ways, the news here is not the differences between Republicans and Democrats but the startling similarities. Both the red and blue carbon tax proposals recognize that carbon is underpriced for the environmental and economic damage it causes.
A bedrock principle of economics is that prices should reflect total costs as closely as possible, and carbon pricing totally fails that basic standard. Whether it’s burning petroleum in transportation or coal for electricity, or carbon emissions from chemicals and cement industries, underpricing carbon hurts the economy in the long run.
Burning underpriced carbon steers investment away from market-priced alternative energy, absorbs tax revenue through large federal and state carbon subsidies (over $20 billion annually in the US), and creates long-term costs paid by the public. Experts associate burning carbon with problems such as rising sea levels and increasing wildfires that will require more taxes and private resources to fix and mitigate.
Republican and Democratic carbon tax proposals differ and there is not much chance the Trump administration will advance the carbon tax. But the bottom line is bipartisan recognition of the problem, and a broad spectrum of economists who encourage passing the tax to reduce the economic costs of human-caused climate change.
That Republican politicians are brave enough to start recognizing the true costs of carbon and propose serious solutions is the best political news of July 2018.