Greenhouse Gas Regulations are Stealth Taxes

In late March the EPA proposed new rules limiting carbon dioxide emissions from new power plants to 1,000 pounds per megawatt-hour. This move spells a death-blow to the coal-fired power plant, as the New York Times admits in its coverage of the announcement:

The Obama administration’s proposed rule to control greenhouse gas emissions from new power plants — the first ever — could go far toward closing out the era of old-fashioned coal-burning power generation.

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Recently built power plants fired by natural gas already easily meet the new standards, so the rule presents little obstacle for new gas plants. But coal-fired plants face a far greater challenge, since no easily accessible technology can bring their emissions under the limit.

There is so much wrong with this approach, that it’s hard to know where to begin.

For one thing, note the implicit picking of winners and losers. The EPA’s proposed rule clearly would deliver market share not only to the pet technologies (such as solar and wind) favored by the environmental left, but would primarily benefit natural gas-fired power plants, since they are currently the major commercial rival to coal. (According to the EIA, in 2011 coal provided 42 percent of the nation’s electricity, while natural gas accounted for 25 percent and nuclear 19 percent.) By issuing a rule that so clearly cripples one technology, the EPA opens the floodgates to special interest lobbying behind the scenes, giving it a great carrot-and-stick over private industry.

We also must never forget that government restrictions on activities act very much like a stealth tax. Indeed, at a formal level environmental economists find little difference between a “cap and trade” system, limiting carbon dioxide emissions by quantity, versus an explicit tax on carbon emissions. By calibrating the numbers, the government can achieve largely the same results tackling either the quantity of emissions or by taxing them. Therefore, if the American public understands that slapping a massive new tax on new coal-fired power plants would be a bad idea, then they should also oppose the EPA’s new rules.

Finally, the EPA’s proposal is horribly inefficient because it is so specific. There are many problems with an explicit tax on carbon, or on a functionally-equivalent cap and trade program. Yet the reason many economists support these plans as a way of tackling climate change, is that they are “market-based.” This term (which is admittedly a misnomer, since government officials implement the schemes) refers to the fact that under an explicit carbon tax, people in the private sector figure out where to cut back on emissions. They do so, naturally, in the least costly manner, and so the macro result is that society achieves the government-mandated emissions reduction in the cheapest way possible.

In stark contrast to these “market-based” schemes, it is far costlier for the government to directly mandate particular areas where emissions reductions must occur. The EPA’s rule—limiting only new power plants to a very specific maximum of 1,000 pounds of carbon dioxide per megawatt-hour—is incredibly arbitrary in this regard. Even using the standard theoretical framework that justifies government policies to reduce emissions, the EPA’s proposal is incredibly inefficient, achieving its stated targets at higher costs than necessary.

Obviously what is happening is that the Obama Administration could not push through a full-blown cap-and-trade program, let alone an explicit carbon tax. The American public is too smart to embrace a massive tax on energy, especially in the midst of a severe recession. The EPA’s proposed emission rules on new power plants is simply a stealth tax that will have similar effects on electricity prices.