Carbon Tax Policy: A Conservative Dialogue on Pro-Growth Opportunities

Alex Brill | Alliance for Market Solutions

Executive Summary

Conservatives generally agree on the need for policies that promote economic growth and improve the efficiency of the economy. When it comes to clean energy and carbon pollution, conservatives must find pro-growth solutions or risk ceding these areas to others. We can’t simply disengage on these issues, or our nation’s prosperity will suffer. Fortunately, there is momentum among voters to pursue conservative ideas for reducing carbon emissions. This book is intended to be a resource in that endeavor.

Specifically, this book seeks to answer whether a carbon tax — that is, a market-based approach to reducing carbon emissions — offers a pro-growth alternative that is more efficient than the existing regulatory regime. “Carbon Tax Policy: A Conservative Dialogue on Pro-Growth Opportunities” brings together conservative experts to answer practical and theoretical questions about establishing a revenue-neutral carbon tax in the United States. Contributing to the volume are Alan D. Viard and Aparna Mathur, resident scholars at the American Enterprise Institute; John D. Graham, dean of the Indiana University School of Public and Environmental Affairs; Phillip Swagel, a professor of international economic policy at the University of Maryland; Robert J. Carroll, a principal at the professional services firm EY; and Kristen Soltis Anderson, an author and pollster.

In the book’s preface, Anderson looks at public opinion, particularly among Republican voters, on climate change and clean energy. She notes that Republicans represent a fast-growing group of Americans concerned about climate change. Just since 2014, belief in global warming among conservative Republicans has increased 19 percentage points. A majority of Republicans support developing and using clean energy in the United States. And voter groups essential to the future of the Republican Party (for example, Millennials and Latinos) favor action on climate change. In other words, there is momentum for the GOP to pursue conservative ideas for reducing carbon emissions.

The rest of the volume presents answers from Carroll, Graham, Mathur, Swagel, and Viard to questions about different aspects of a carbon tax, with each chapter oriented around a particular theme. Chapter 1 focuses on existing and proposed carbon-reduction regulations and how a carbon tax could serve as an effective substitute for a regulatory strategy. The primary carbon-reduction regulations currently in effect include Corporate Average Fuel Economy (CAFE) standards, which require certain levels of fuel efficiency in light-, medium-, and heavy-duty vehicles; the Obama administration’s Clean Power Plan, which limits power-sector carbon emissions at the state level; the renewable fuel standard, which applies to the amount of renewable fuel that distributors include in transportation fuel; and Appliance and Equipment Efficiency Standards, which require energy efficiency in residential and commercial appliances and equipment.

A better way to achieve the goal of these various programs, contributors argue, is with a carbon tax. This market-based approach would create incentives to reduce carbon emissions instead of relying on government mandates. Leaving carbon abatement decisions to carbon producers is more efficient than having regulators stipulate the abatements because producers are in a better position to choose the least-costly abatements and pursue innovations. A carbon tax also raises revenue that can be used for other purposes, like lowering distortionary taxes such as the corporate income tax. With a carbon tax in place, current burdensome regulations could be repealed.

Chapter 2 examines how a carbon tax would actually work in the United States, from where it should be collected to how the rate should be set. Collecting the tax where energy enters the economy (such as power plants and oil refineries) would be the most efficient because it involves the fewest collection points but ultimately distributes the cost across our energy-driven economy. Regarding the appropriate carbon tax rate, theoretically it should equal the domestic social cost of carbon (that is, the amount of harm that carbon emissions cause to society) if the tax is being imposed unilaterally in the United States alone. In reality, this is difficult to calculate. One proposed way of introducing a carbon tax is to start with a low rate and gradually increase it. The rate obviously affects the amount of revenue a carbon tax could be expected to generate. A tax of $15 per metric ton, for example, would have yielded more than $100 billion in 2010.

How carbon tax revenue could be used to advance tax reform is addressed in Chapter 3. Contributors argue that a carbon tax in the United States should be revenue-neutral — that is, the revenue gained from the tax should be used to reduce other taxes. Should the revenue be used to lower other, highly distortionary taxes, the result could be higher economic activity. One of the most distortionary taxes in the United States is the tax on corporate income, and a popular “tax swap” for a carbon tax is a reduction in the corporate tax rate. A carbon tax of $15 per metric ton in 2010 would have brought in more than half of what the corporate income tax did that year. A carbon tax could also be key to tax reform because it would move the U.S. tax system toward taxing consumption rather than income, which would have positive effects for saving, investment, and wages.

In Chapter 4, contributors address questions about the impact of a revenue-neutral carbon tax on economic growth. Of course, how the revenue from a carbon tax is used will in large part determine the growth impact. A corporate rate cut (from 35 percent to 16 percent) funded by a carbon tax, for example, could result in an increase in U.S. economic output of more than 2 percent if paired with the repeal of recent regulations. Other economic impacts to be expected from a carbon tax include higher prices of consumer goods. But per-household GDP is expected to increase under a revenue-neutral carbon tax. For example, it is estimated that annual per-household GDP could increase nearly $3,000 if carbon tax revenues are used to reduce the corporate income tax rate. The economic impact of a carbon tax would also vary considerably by industry as well as by geography. Some assistance for adversely affected workers may be necessary.

Chapter 5 concludes the volume by examining a U.S. carbon tax in a global economy context. One policy option to consider would be a border adjustment to the carbon tax, which would ensure that imports into the United States face a carbon tax if the source country does not have one. But, should the United States adopt a carbon tax, it would be joining many other countries and regions — including Canada, China, Mexico, and the European Union — in pursuing a price mechanism to curb carbon emissions. Ultimately, by reducing our demand for traditional fossil fuels and increasing our investment in clean-energy sources and our use of renewable energy, a carbon tax could help make the United States more energy independent.

Given the nascent conservative momentum behind some kind of action on carbon reduction, conservative leaders are encouraged to take the opportunity now to explore pro-growth and market-based alternatives to the current regulatory path. The aim of this book is to be a resource for that important work.

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