In today’s New York Times, Rep. Bob Inglis (R-SC) and supply-side guru Arthur Laffer propose a new carbon tax to be offset by reductions in other taxes, such as income and payroll taxes. I think this is a good idea (and not just because I have endorsed it before).
Conservatives, even those vehemently opposed to GHG controls, should like this deal because it is substantially better than the status quo. As a consequence of Massachusetts v. EPA, the Environmental Protection Agency will be required to regulate GHGs, and not just from motor vehicles. The EPA has affirmed the potential negative consequences of climate change too many times for it to avoid making the endangerment finding that triggers regulation under several Clean Air Act provisions. As a consequence, it is only a matter of time before agency is mandated to control such emissions from new motor vehicles and a wide range of other sources, including power plants, factories, and perhaps even non-industrial buildings. Such regulation would be tremendously costly, but not terribly cost-effective, and thus much worse than a revenue-neutral carbon tax. A tax trade of this sort is also the best chance conservatives have to enact pro-growth tax cuts in the current environment.
Advocates of a cap-and-trade system should also support this sort of proposal. Some like to think that the Obama administration could enact a cap-and-trade system under the Clean Air Act through administrative fiat. This is sheer fantasy. The Clean Air Act is not that flexible, and any idea to the contrary should have been dashed when the U.S. Court of Appeals invalidated the Bush Administration’s effort to create a regional cap-and-trade regime for other pollutants. The most prominent cap-and-trade program, that for acid rain precursors, was enacted by Congress. Legislative change will also be required for an equivalent GHG control regime.
The primary reason to oppose carbon taxes is the potential political cost. No politician wants to be on record supporting a tax increase. Yet the sort of cap-and-trade scheme endorsed by President-elect Obama will have the same effect as a new tax. Indeed, it’s likely to be worse because a cap-and-trade system will be particularly vulnerable to special interest pleading that will increase its costs and reduce its effectiveness. Capping the most ubiquitous by-product of modern civilization will be a tremendously costly enterprise. If it is to be done, it must be done as efficiently as possible.
With a deal of the sort Inglis and Laffer propose, a carbon tax might not be the political poison pill that some fear. Offsetting the tax with other reductions would offset the negative economic consequences of taxing carbon. Moreover, if the promise of pro-growth tax cuts could lure enough Republicans to support the plan, Congressional Democrats would have political cover to enact an ambitious plan. So, if the Obama Administration wants to enact a transformative climate change policy, trading a carbon tax for tax breaks could be a way to do it.