Two hits await you below in this September carbon tax recap. The first pertains to the Democrats’ proposed $3.5 trillion budget bill and the rumors it will contain carbon pricing mechanisms. The second is a link to a podcast Alex Stevens and I recorded with Todd Myers last week. Todd heads the energy and environment efforts at the Washington Policy Center. He’s been a supporter of various carbon pricing plans in the past; give the podcast a listen to hear how his views have evolved on the issue.
September 24, 2021:
Opposition from a single moderate Democrat to corporate and income tax rate increases has revived efforts in the Senate to draft a tax on carbon dioxide pollution as a way to pay for the Democrats’ proposed $3.5 trillion budget bill.
Senator Kyrsten Sinema of Arizona has not advocated for a carbon tax, which President Biden and other key Democrats have shied away from as a huge political risk. But her resistance to tax rate increases to pay for the Democrats’ ambitious social policy and climate legislation has set off a scramble for alternatives, including a carbon tax, international corporate tax changes and closing loopholes for businesses that pay through the individual income tax system.
Senator Ron Wyden of Oregon, the chairman of the Senate Finance Committee, confirmed that the Senate majority leader had asked him to craft legislation that would put a price on carbon emissions but to ensure that the policy would respect Mr. Biden’s pledge not to raise taxes on families earning less than $400,000.
IER’s Take
According to the Democrats’ Senate Finance Committee document floating around Washington, the “major options” for carbon pricing are as follows:
1) a per-ton tax on carbon dioxide content of leading fossil fuels (e.g., coal, oil, natural gas) upon extraction, starting at $15 per ton and escalating over time,
2) a per-ton tax on carbon dioxide emissions assessed on major industrial emitters (e.g., steel, cement, chemicals),
3) a per-barrel tax on crude oil.
As I wrote in my September 28 column at The American Spectator, when you “put a price on carbon” you guarantee electricity becomes harder to come by, a problem Europeans are reckoning with right now.
Carbon pricing—whether in the carbon tax form or Europe’s cap-and-trade style—harms middle and working class people most acutely. This phenomenon is known in economics circles as “regressivity.” Carbon pricing is regressive because energy use does proportionally increase or decline with income. Middle and working class families pay more on energy as a percentage of their budgets, since many energy expenditures, like fueling vehicles to get to work and powering homes with electricity, are all but unavoidable.
It’s no wonder Spain is now convulsing with energy cost protests.
Without specific language available on the Senate Democrat plan, it’s impossible to predict what will happen here, but a bit of back-of-the-envelope math gives the general picture.
According to the Energy Information Administration, the average annual electricity consumption for U.S. residences is 10,649 kilowatt-hours (kWh). At the U.S. average of 0.92 pounds of carbon dioxide per kWh, that means each household emits about 4.45 metric tons of carbon dioxide from electricity use each year.
At $50 per ton, in order to maintain the same level of appliance use, temperature comfort, etc., each household would pay more than an additional $220 each year on power thanks to this tax.
That figure, of course, doesn’t include the higher prices we would face economy-wide, as businesses recalibrate to adjust to higher tax-based operating costs of their own. A carbon tax effectively robs us of marketplace utility by inducing deadweight loss. It will surely be described as “taxing polluters,” so it’s important to reiterate that the fossil fuels aren’t a sideshow, they’re the main feature. In terms of primary energy consumption, oil, natural gas, and coal contribute 35, 34, and 10 percent of U.S. energy on a Btu basis respectively. At a combined 79 percent of our mix, fossil energy is indispensable to our prosperity, as it is throughout the world. As it so happens, the U.S. uses fossil fuels at a slightly lower clip than the world as a whole, for which the fuels make up 85 percent of the mix.
According to Bloomberg, lawmakers are “working to ensure that a significant chunk of the proceeds goes back to middle- and low-income families” in order to offset this well-known regressivity flaw. Carbon taxers sometimes try to frame these payouts as rebates. By instituting rebates, however, lawmakers would divert revenue away from the $3.5 trillion reconciliation bill that’s the ostensible impetus for the new tax. According to the New York Times, the Senate Finance Committee’s claim that carbon pricing could generate $500 billion in revenue doesn’t factor in these payouts to households.
We don’t know what model Senate Democrats might ultimately propose to “put a price on carbon.” What we do know is that Europeans are suffering from the effects of similar political hubris right now in the form of higher energy costs. Each day, news flows across the Atlantic that should dissuade the U.S. away from Europe’s decarbonization experiment. Precisely the opposite is happening. As in Europe, the U.S. may soon layer another costly policy into its messy climate cake.
September 24, 2021:
On this episode of the Plugged In podcast, the team sits down with Todd Myers, the Director of the Center for the Environment at the Washington Policy Center, to discuss the free market’s ability to produce innovative solutions to problems facing the energy sector. Now streaming below, or wherever you listen to podcasts.
