August Recess Carbon Tax Roundup

In what has become a July ritual, members of Congress—from both parties and in both chambers—introduced long-shot carbon tax bills last month. With the swamp’s summer heat as a motif, Senator Chris Coons (D-Del.) advanced the Climate Action Rebate Act and in the House of Representatives John Larson (D-Conn.), Dan Lipinski (D-Ill.), and Francis Rooney (R-Fla.) put forth the America Wins Act; the Raise Wages, Cut Carbon Act; and the Stemming Warming and Augmenting Pay Act, respectively. No matter the trappings, a carbon tax would mean less purchasing power and a lower standard of living for Americans. Nevertheless, these bills vary in their structures and, thus, have their own unique failings. Whether it be the revenue-recycling strategy, the point of taxation, or the parameters used to conjure a given bill’s social cost of carbon estimate, each carbon tax has a flaw that will prove fatal—either for the bill itself in the legislative process or, if signed into law, for the American economy.

With this post we’ll break down the highlights and lowlights from 2019’s summer carbon tax crop.

Climate Action Rebate Act — Sen. Coons

• $15 per metric ton in 2020, increasing by $15 every year
• Increasing by $30 following any year in which an emission reduction target is missed
• Rebates 70 percent of net revenue to low- and middle-income Americans on a monthly basis
• Remainder spent on government investment in energy and infrastructure projects, as well as on assistance for workers harmed by the tax

Quote from Sen. Coons: “To address this threat, we need an innovative strategy that can reduce emissions and generate economic growth, not hinder it. I’m proud that this legislation will create a cleaner environment, while investing revenue directly into workers, families, and communities—helping to spur innovation, create new jobs, and ease the transition to a cleaner energy future. I am hopeful that we will continue to have bipartisan conversations about addressing this issue.”

AEA comment: Sen. Coons’ invocation of economic growth is dubious in light of the widespread economic modeling results that show a lump-sum rebate revenue-recycling strategy to be particularly detrimental to economic performance. A carbon tax will hinder economic growth relative to baseline expectations, but not all revenue uses have the same effects. Reducing distortionary taxes elsewhere—a “tax swap”—shows the most promise for maintaining or even augmenting economic growth. Instead, the Coons plan would, in essence, be a new spending package.

America Wins Act — Rep. Larson

• $52 per ton, rising 6 percent annually above inflation
• Spends $1.2 trillion over 10 years on infrastructure projects including: roads, bridges, tunnels, transit, rail, aviation, sewer systems, levees, flood protection, dams, ports, waterways, drinking water systems, broadband, energy infrastructure, the electric grid, schools, healthcare, and public housing
• Spends $44 billion on energy research
• The remainder of the revenue would go towards rebates for low-income households and assistance including pension boosts and green jobs training for coal communities

Quote from Rep. Larson: “We cannot wait any longer to address our global climate crisis. The America Wins Act would reduce greenhouse gas emissions above and beyond our Paris Climate Accords commitments, while funding historic investments in rebuilding America’s infrastructure and combatting climate change. Over ten years, over $1 trillion would be invested in all types of needed infrastructure from transportation to clean water, while also dedicating significant funding to clean energy and climate change related programs, and supporting climate justice through assistance to frontline and carbon-reliant communities. It’s time that we make our goals a reality and save our planet.”

AEA comment: Rep. Larson, at the very least, deserves credit for his honesty. This bill is an unabashed revenue raiser that would syphon money from the private economy and utilize it towards an array of social ends, many of which are far removed from any effects climate change might have.

Raise Wages, Cut Carbon Act — Rep. Lipinski

• $40 per ton starting in 2020
• Increases by 2.5 percent above inflation for every year that the United States does not meet emission reduction targets
• Coal, oil, and natural gas would all be taxed where they enter the U.S. economy—at the mine mouth, pipeline, or at the U.S. border
• Uses 94 percent of net revenue on payroll tax cuts and increases to social security benefits
• 5 percent on the Low-Income Home Energy Program
• 1 percent on the Weatherization Assistance Program

Quote from Rep. Lipinski: “This bill incentivizes adoption of cleaner renewable technologies, and will break our addiction to fossil fuels that are so damaging to our environment. This bill will also be a boon to taxpayers and has the advantage of providing predictable pricing to businesses over time to encourage deployment of clean energy technologies, stimulate innovation, and mitigate global climate change. I have helped lead the charge for carbon pricing since I helped introduce the first bipartisan carbon fee bill in 2009, and will continue to be a champion for real commonsense solutions to climate change.”

AEA comment: Giving credit where it’s due, it is mildly refreshing to see a bill that would use the carbon tax’s revenue to reduce harmful taxes elsewhere. Some analysts have found that tax swaps of this sort can be economically beneficial. (Others have argued to the contrary. See: tax interaction effect.) But what must be respected is that any economic benefit of a carbon tax swap would flow entirely from the reduction of taxes elsewhere, not from the imposition of the new one. This says more about our existing tax code than it does about the merits of taxing greenhouse gas emissions.

Stemming Warming, Augmenting Pay Act — Rep. Rooney

• $30 per metric ton starting in 2020
• Annual increase of 5 percent above inflation
• If in two straight years emission reductions miss targets, an automatic $3 per ton increase will be charged
• Uses 70 percent of net revenue to reduce payroll taxes
• 20 percent of the net revenue would be used to establish a carbon trust fund—designated for state block grants used to offset higher energy costs for low-income households and advanced research and development programs on climate adaptation and energy efficiency
• 10 percent would be paid to Social Security beneficiaries
• Places a 12-year moratorium on Clean Air Act regulations that can be removed if emissions targets are not met

Quote from Rep. Rooney: “Those industries that choose to pollute our environment should bear the burden of cleaning it up.  Putting a price on carbon will level the economic playing field in the energy sector, unlock market-driven innovation, and lead to the deployment of low, zero, and negative carbon technologies. It will help create millions of new jobs and slash U.S. carbon emissions dramatically, making it a powerful tool for curbing climate pollution.”

AEA comment: Like Lipinski’s bill, Rooney’s deserves credit, albeit to a lesser degree, for utilizing the tax swap approach. Further, the moratorium on Clean Air Act regulations of greenhouse gas emissions would be entirely appropriate. But the plaudits stop there.  Rep. Rooney states, “…industries that choose to pollute our environment should bear the burden of cleaning it up.” This statement is suspect in two ways.

First, industrial entities that emit greenhouse gases do so because consumers in the marketplace desire their products and services. Manufacturers, power plants, and transportation companies emit greenhouse gases because we, the customers, value what they have to offer. Their goods and services make our lives better in myriad ways. Their choosing, as the Congressman puts it, to emit greenhouse gases is precipitated by our choosing to buy from them. The suggestion that “industries that choose to pollute” can be isolated from our economy and society at large is nonsense.

Second, while a tax on greenhouse gas emissions would in theory reduce said emissions, it would not serve to “clean up” past emissions. Rooney’s statement would seem to imply that the tax ought to be used to fund direct air capture or the planting of carbon dioxide-digesting trees, but nothing of that sort is to be found.

Conclusion

This year’s carbon tax crop is sure to rot in the field, thanks to the public’s minimal appetite for energy taxation. Be that as it may, the annual rite indicates how pro-carbon tax thinking is developing and gives us the opportunity to sharpen our own argumentation. Pulling alongside the lump-sum rebate revenue-recycling approach (typically marketed as a “dividend”), the tax swap approach favored by Rooney and Lipinski has shown a resurgence and will require attention in the coming months.

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