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October 3, 2016

R Street Offers No “Bargain” on Carbon At All

October 3, 2016
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A new report from R Street tries to convince conservatives that they should embrace a “carbon bargain” involving a new carbon tax, so long as several important principles are obeyed. Specifically, R Street insists that a new carbon tax be revenue neutral, with the funds devoted exclusively to reducing capital taxes, and it also insists that “[p]re-emption of the Environmental Protection Agency’s Clean Power Plan and other efforts – including CAFE standards, fuel taxes, the renewable fuel standard, the investment and production tax credits, efficiency standards and restrictions on fossil resource development – would be a necessary prerequisite.” So long as the deal included these (and some other) elements, R Street promises conservatives that a new carbon tax would actually be good for the economy, as well as correcting possible market failures from greenhouse gas emissions.

In the present post, I don’t want to rehash IER’s long-standing criticism of such “carbon tax swap” deals in terms of the technicalities. Indeed, the first half of the R Street report itself does a good job summarizing all of the problems with a carbon tax—especially with the dubious notion of the “social cost of carbon.” (Since the author of the R Street study, Catrina Rorke, explicitly cites my work for IER on the tax interaction effect—which I spell out here—I can hardly complain that she ignored our objections.) So R Street’s own study acknowledges many of the dangers in their own approach.

Rather than reiterating our list of technical objections, let me in this post instead simply step back and ask: What is the point of studies such as the R Street proposal? It’s not as if President Obama or Gina McCarthy are making a substantive offer here. Rather, R Street’s proposal (and others like it) are fantasy land bargains from people with no political power in order to get conservatives and libertarians to abandon their opposition to a massive new tax. What is the point of this exercise?

After all, it’s not as if even mainstream environmentalists are on board. No, the relevant wonk at Vox (to pick just one example) is actively telling the rank and file to reject any compromise that relies exclusively on a “carbon price” to “internalize the externalities.” To repeat, I’m not merely pointing to Joe Romm or Al Gore, I’m saying even progressives who are professional economists (such as Paul Krugman, who would presumably understand the benefits of a “market solution”) are telling their readers that a carbon tax isn’t enough. And when a progressive economist does bust his butt to get a revenue-neutral carbon tax on the ballot, environmental groups oppose it and Greg Ip at the Wall Street Journal is flummoxed as to why leftists aren’t embracing a good ol’ “market solution” when they see one.

Allow me to let Catrina Rorke and Greg Ip in on a dirty little secret: The typical progressive activist, and the typical administrator at the EPA, do not share their general admiration for the market economy. It is not as if the people of Greenpeace toss and turn at night, lamenting the Pareto inefficiencies in our economy and the fact that industry produces a bit above the “optimal” level of pollution. No, these people do not like capitalism, period, and think Americans are consuming too much.

Consider, for example, the Sierra Club’s opposition to nuclear power. If human-caused climate change is such a serious threat, it would make sense for the Sierra Club to support nuclear power to reduce CO2 emissions, especially for the next few decades. Yet for the last forty years, the Sierra Club stated they would reject nuclear power until the “[d]evelopment of adequate national and global policies to curb energy over-use and unnecessary economic growth” (emphasis added). It’s true that last month the Sierra Club eliminated this clause, but for forty years this has been the Sierra Club’s position—nuclear energy is bad because (among other reasons) it could foster unnecessary economic growth.

Look at the R Street study’s own table, showing that, for example, the 2011 change to CAFE standards translated into carbon emission reductions at a cost of $125 per ton. This was not an unnecessarily expensive way to reduce emissions, this was instead a completely unjustified power grab that must be explained using Public Choice or more broadly political science, not environmental economics.

For R Street, the Niskanen Center, and any other groups trying to convince conservatives and libertarians of the virtues of rolling back nutty top-down regulations and replacing them with a clean, simple carbon tax: They must first explain why those interventions exist in the first place. When these groups explain that, they will then see why no conservative or libertarian should believe offers of a “tax swap deal” that brushes away all of the power that the EPA and other organizations have accrued over the years.

In this context, it’s an irrelevant academic point of whether a new carbon tax, with all funds directed to tax breaks for corporations and capitalists, plus the elimination of all other federal regulations on emissions, would be economically beneficial on net. When I read studies like R Street’s, I feel like I’m a bank teller looking at guys storming in with shotguns and ski masks, and my colleague says, “Let’s offer them free checking.”

I’m glad to see that R Street’s energy analysts are admitting all of the tremendous problems with a carbon tax (such as leakage, the tax interaction effect, and the arbitrariness of the “social cost of carbon”), but they valiantly throw all of those concerns aside and still assume they can strike a deal with groups who are saying, in print, that they are not going to make such a deal. In closing, I simply repeat my initial reaction: I honestly don’t know what the point of these reflections is, except to weaken conservative and libertarian resistance to a massive new tax that R Street admits could bring in more than $1 trillion in the first ten years.

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