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Commentary By Diana Furchtgott-Roth

Carbon Tax Won't Curb Climate Change, But It Will Clobber Growth

Energy, Energy Regulatory Policy, Technology

Residents of coal states voted for President Trump because he promised to help them. In contrast, the beneficiaries of a carbon tax would be Democratic states that invest in green energy schemes. 

Proponents of carbon tax were expecting a Clinton administration, but they don't want to change their playbook. Instead, they're trying to dress up the carbon tax as a conservative solution for President Trump.  But, luckily for Americans, he's too smart to be fooled.

Just before Trump's inauguration, the U.S. Treasury's Office of Tax Analysis brought out its Methodology for Analyzing a Carbon Tax, which concluded that a $49 per ton carbon tax could raise the incomes of the bottom tenth of the income distribution by almost 9%.

Then, the week after inauguration, the Brookings Institution published a report by Aparna Mathur and Adele Morris, scholars at the American Enterprise Institute and Brookings respectively, showing how a $32-per-ton carbon tax could be used to increase the Earned Income Tax Credit.

Fast forward two weeks to February 8, when the Climate Leadership Council cleverly proposed not a carbon tax, but carbon dividends, a new name for a $40-per-ton carbon tax that would be returned to Americans in the form of dividends. Everyone knows that dividends are popular, but a tax is not.

The carbon dividends plan was featured simultaneously in op-eds in the Wall Street Journal and in the New York Times with practically the same headline. Republican Secretaries of State James Baker and George Shultz authored "A Conservative Answer to Climate Change", and Harvard professors Martin Feldstein and Greg Mankiw and Climate Leadership Council president Ted Halstead wrote "A Conservative Case for Climate Action."

In case anyone thought the releases were coincidental, the Climate Leadership Council carbon dividends plan cites the Treasury study, showing that the "conservative" economists were working closely with the Obama administration Treasury officials. They show that a $40 per ton carbon tax would reduce U.S. emissions by 27% from 2005 levels by 2025, fulfilling the Paris climate change accords agreed to by President Obama in December 2015.

Although the tax, amounting to $2.4 trillion over 10 years, is pitched as a way to help low-income Americans, it would be detrimental to economic growth.  No one who is familiar with Washington politicians can seriously believe that all the $2.4 trillion would be rebated back to American families, either in the form of so-called dividends, or in the form of enlarging the Earned Income Tax Credit.

Rather, every special interest in Washington would want its own bite of the apple — for infrastructure, schools, defense, welfare — the list is always endless. Since no government is capable of spending at the level of efficiency of the private sector, government dollars are less valuable than dollars spent by the individual.  That means less growth.

Under our polarized system of government, any tax on carbon would be an additional tax, without the offsets that make it so attractive to academics. It would hurt the poor and raise domestic prices relative to prices of imports.

Furthermore, the distribution of the tax would have harmful geographic and social effects with the United States. It would fall primarily on coal, which has the largest carbon content of any fuel. The tax on coal would be many multiples of the tax on natural gas.  Residents of coal states voted for President Trump because he promised to help them.

In contrast, the beneficiaries of a carbon tax would be Democratic states that invest in green energy schemes, such as California and New York and Massachusetts.  Residents of these states voted Democrat.

Finally, a carbon tax would raise the price of American goods relative to foreign ones, encouraging the consumption of foreign goods.  Yes, proponents suggest border adjustments, tariffs on foreign goods that equalize their prices.  But everyone knows that this is an administrative nightmare, and that people are going to find ways around it.

President Trump wants to discourage foreign consumption and encourage domestic consumption — a carbon tax would do just the opposite.

America is responsible for 16% of global greenhouse gas emissions, and America's reductions in carbon usage will not help climate change unless other countries also limit their emissions.

Currently, other large emitters, specifically India and China, have no plans to sign on to any reduction scheme, either tax or regulatory.  So the United States would be imposing a cost on the economy with practically no benefit to climate change.

A carbon tax is an idea that was tailor-made for a Clinton administration, but it is a nonstarter in Washington today. House Speaker Paul Ryan is unenthusiastic.  Senate Majority Leader Mitch McConnell is from Kentucky, a coal state.  And President Trump does not want to betray his voters in coal states such as Pennsylvania, West Virginia, and Ohio.

This piece originally appeared in Investor's Business Daily


Diana Furchtgott-Roth is a senior fellow and director of Economics21. She also serves on the transition team for President-elect Donald Trump. Follow her on Twitter here.

This piece originally appeared in Investor's Business Daily