With international travel starting back up, we’ll take a look this month at how the carbon tax discussion has evolved in Europe and Southeast Asia before circling back stateside.
Swiss voters rejected a trio of environmental proposals on Sunday, including a new law intended to help the country meet its goal for cutting carbon emissions under the Paris Agreement on Climate Change.
A new CO2 law was narrowly rejected, with 51.6% of voters opposing it in a nationwide referendum conducted under the country’s system of direct democracy.The result was a defeat for the Swiss government which supported the new law that included measures such as increasing a surcharge on car fuel and imposing a levy on flight tickets. The rejection meant it would now be ‘very difficult’ for Switzerland to reach its 2030 goal of cutting carbon emissions to half of their 1990 levels and to be become net neutral on emissions by 2050, Environment Minister Simonetta Sommaruga said.
IER’s Take
Switzerland’s direct democracy showed what seems obvious in most places: politicians and technocrats have more of an appetite for carbon pricing than the general public. This referendum was a rejection, albeit a narrow one, of an increase in emissions fees on cars and airline tickets drawn up by the Swiss government. Polling last year reportedly showed that three-quarters of the population favored the law, so this comes as unexpected rebuke of the carbon tax tide.
But as noted by the Tax Foundation in a report released earlier in June, Switzerland is not overturning its carbon pricing regime outright. That tax will remain quite high, at the equivalent of more than $100 per ton.
While that figure would be quite impactful in the U.S., in Switzerland it is less so because the country has gotten almost all of its electricity from hydropower and nuclear for decades. Ditto for Sweden, another country in the Tax Foundation report that has a high carbon tax. Due to Switzerland’s transportation sector, however, oil is the largest contributor to the country’s total energy supply on a ktoe basis.
Indonesia’s finance minister on Monday presented a government proposal for overhauling tax regulations that would introduce a carbon tax, a higher VAT rate and a programme to report undisclosed assets. Sri Mulyani Indrawati told a meeting with parliament’s finance commission the measures were aimed at boosting government revenue that have dropped in Southeast Asia’s biggest economy due to the coronavirus pandemic. However, some analysts warned implementation could be challenging, with the economy still reeling from the pandemic. ‘Even though we are discussing this during the COVID pandemic, it does not divert our attention from the medium-, long-term need to build a fair, healthy, effective and accountable tax system,’ Sri Mulyani said, promising implementation will take into account economic recovery.
The minister proposed increasing the base value added tax (VAT) rate to 12% from 10% currently, applying a 5%-25% rate range for some goods and services, and removing most exemptions. To limit the impact on the poor, she proposed more subsidies. An income tax rate of 35% was floated for people earning at least 5 billion rupiah ($345,662) annually. Indonesia now applies 5% to 30% personal income tax. She also proposed a new carbon tax of 75 rupiah ($0.0052) per kg of CO2 equivalent and an excise tax for all plastic products.
IER’s Take
I will be surprised if Indonesia follows through with this plan. As I wrote at National Review this spring, Indonesia has the potential to be a real economic superstar in the coming decades. It has a young population and is poised to join Malaysia and Thailand in the wealthier tier of ASEAN countries. This carbon tax plan would throw that into doubt, as many in Indonesia recognize. Already, backlash against the plan is being reported. Bloomberg’s Claire Jiao and Grace Sihombing, for example, wrote on June 30 that “Indonesia’s plan to tax carbon output risks slowing growth in Southeast Asia’s biggest economy and faces resistance from some of the country’s biggest industries.”
Indonesia gets three-quarters of its energy from coal, oil, and natural gas. For a developing country, limiting citizens’ access to those resources is an especially difficult political sell. Since 2002, Indonesian middle class consumption has grown by more than 10 percent annually. As Indonesians get richer, demand for the luxuries that we in the U.S. and elsewhere take for granted, like home kitchen appliances, will continue growing. As Indonesians personally experience, the affordability of energy is critical to making the leap to the global middle class.
This proposal would short circuit that process. Jiao and Sihombing report that it could cost the country 0.58 percent from the pace of economic growth by 2030, lower the employment rate by 0.15 percent, and lower real consumption by 1.97 percent by the end of the decade.
Interestingly, the proposal is explicitly described as a revenue-raising mechanism. As IER has long argued, the temptation to use the carbon tax as a revenue source is strong the world over, despite the economics literature indicating that a tax-swap would be the only clear route to avoiding the sorts of employment, output, and consumption drops Indonesia may face.
Biden’s no-tax pledge hinders several good tax policy options to fund an infrastructure proposal: user fees such as raising the gas tax or enacting a vehicle mileage tax, and a carbon tax. This broad-based excise tax taxes the negative externalities of greenhouse gas emissions. A carbon tax has a unique advantage compared to the other pay-for options: it would raise a significant amount of revenue to fund the administration’s infrastructure proposal and help America achieve decarbonization most effectively and efficiently. Part of the revenue raised by a carbon tax could also be returned to low-income households as rebates to address the inherent regressivity of a carbon tax.
IER’s Take
Lo and behold, here in the United States carbon tax advocates are suggesting that we use a carbon tax to raise revenue as well. Though some carbon tax advocates consistently advise lowering other taxes when a carbon tax is raised, it is far more common for advocates to dangle new money before policymakers.
Sens. Sheldon Whitehouse (D-R.I.) and Brian Schatz (D-Hawaii) yesterday introduced a new carbon pricing bill they say could generate some $2.4 trillion in revenue over 10 years, a potentially appealing selling point amid congressional debate on an infrastructure bill.
…The “Save Our Future Act” would put a $54-per-ton fee on carbon emissions starting in 2023, with the price rising 6% over inflation each year. The new bill as introduced would direct its revenues to several places. Low- and middle-income families would have some of it returned via two, $400 payments each year. A $255 billion chunk over 10 years would be directed to environmental justice communities, while another $120 billion would go to help fossil-fuel-reliant communities transition over the next decade.
IER’s Take
This is but the latest in a long line of Schatz-Whitehouse carbon taxes. As Niskanen laments, however, the White House wants no part of it.
Nevertheless, the specifics and inclusions in a given carbon tax bill are always of note. Here we see:
- a small lump-sum payout to a subset of Americans
- new spending on what the bill calls environmental justice communities—which would include “(A) a community of color; (B) a low-income community; and (C) a Tribal or indigenous community.”
- establishment of an Office of Energy Veterans Assistance
Like its predecessors, this won’t make much of a mark, but it is interesting to see how language has changed over the years. The 2018 Schatz-Whitehouse bill, the American Opportunity Carbon Fee Act, didn’t include a single reference to “environmental justice,” whereas the present bill has 15. On the flipside, the 2018 bill refers to “low-income individuals” on six occasions, while the present bill does not use that term even once, opting for “community” focus. (Though it does refer to “low-income households” once, to be fair.)
