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Carbon tax most efficient in tackling climate change

March 1, 2019

What Republicans Should Do about Climate Change

It is encouraging to see more and more fellow Republicans shed the reflexive skepticism about climate change that has characterized the GOP for years. Now, Republicans need to offer solutions. As Congressman Bill Flores (R-Texas) noted at a recent hearing, “I was pleased that all the panel and almost everybody up here on the dais has agreed that climate change is real. The question is: how do we deal with it?”

Broadly speaking, there are three approaches U.S. lawmakers can consider when they want to shift behavior among consumers and producers: require people or businesses to change (regulations), pay people or businesses to change (subsidies), or price the unwanted behavior (a tax). We have ample experience with clean-energy regulations and subsidies, and they have clear faults that a tax does not.

Regulations targeting carbon emissions—whether directly (like the Clean Power Plan) or indirectly (like Corporate Average Fuel Economy standards)—limit market choices and create hidden costs that market participants try to circumvent, undermining the purpose of the regulation. Regulations tend to favor existing companies that effectively sue or lobby to ensure that their technologies are permitted. And because regulations evolve slowly, they tend to lock in existing technologies and impede innovation. Regulations also tend to impose burdens inefficiently across the economy. For example, today we disproportionately regulate carbon emissions from the transportation sector compared to the industrial sector, and virtually ignore emissions from other sectors.

Subsidies, which include grants and tax credits, are hardly less inefficient and ineffective. Like regulations, subsidies create incentives for lobbying and favor existing technologies. Moreover, moving our economy toward low-carbon energy through subsidies is dauntingly expensive. We already have billions of dollars’ worth of clean-energy and energy-efficiency tax breaks and billions more in direct federal expenditures on energy-related activities. In an era of trillion-dollar deficits, we cannot spend our way to a low- or no-carbon economy—the plain objective of the Democrats’ Green New Deal—even if subsidies did not involve government officials picking winners and losers.

A tax on carbon emissions, however, does not suffer from these failings. It is efficient because it puts an explicit price on all carbon emissions, which unlike the hidden cost of regulations, is designed for firms and consumers to avoid. And while this initiates a reduction in emissions, it also raises revenue that can be utilized to counteract any drag on the economy arising from the tax—say, through an offsetting reduction in income tax rates that encourage work and investment.

A carbon tax also creates an unhampered incentive for innovation, which could dramatically lower the cost of reducing carbon emissions in the future. With the cost of emitting carbon uniformly higher, consumers and producers will make a broad set of adjustments. Some changes will occur quickly, such as fewer miles driven, while others will occur over time, such as more energy-efficient homes and buildings. All along, producers will pursue newer technologies to supply our electricity demand in a low-carbon fashion. This is in stark contrast to targeted subsidies or grants that narrowly encourage just one type of technology, research, or innovation.

It is reassuring that Congressman Flores expressed concern about a “chaotic headlong rush toward decarbonization.” Many other Republican lawmakers rightly have the same fear. While recognizing the need for a responsible and meaningful climate change policy, Republican lawmakers should also ensure that any new policy leverages, not limits, markets. We need to get this right for the long-term. That requires a solution more efficient than regulations and more affordable than subsidies—it requires a tax on carbon pollution.

Alex Brill is a resident fellow at the American Enterprise Institute. Alex Flint is the executive director of the Alliance for Market Solutions