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Commentary By Jonathan A. Lesser

The Painful Realities of Carbon Tax-and-Dividend Schemes

Energy, Energy Climate, Regulatory Policy

Late last month, Climate Leadership Council President Ted Halstead and Exelon CEO Christopher Crane touted their carbon tax-dividend scheme, under which they promise “the vast majority of Americans will be economic winners.” The plan sounds too good to be true — ever-higher carbon taxes providing ever-greater economic benefits — because it is. In reality, such a tax would cripple the economy and set off trade wars with the rest of the world that would dwarf our current dispute with China. And to top it off, the proposal would have no measurable impact on global climate.

The CLC proposal starts with a $40 per ton tax on carbon dioxide emissions, increasing at least 5% above the rate of inflation annually. At current CO2 emissions levels, that’s about $200 billion per year. If inflation averaged just 2% per year, by 2025 the tax would increase to $56/ton. For gasoline, that would mean a tax of $0.55/gallon.

Except the tax would increase inflation rates because energy is used to produce virtually all goods and services. For example, the OPEC oil embargoes in the 1970s were a key contributor to the high inflation rates of that decade. Hence, the carbon tax would increase far faster than advertised, increasing the economic harm.

The plan sounds simple. But the Climate Action Rebate Act, which proposes this same tax-and-dividend scheme, illustrates the messy realities of such climate sausage-making.

Under CARA, 70% of the money raised would be returned to families making less than $130,000 per year. Those dividends would be treated as taxable income, so the benefits to families would be much less than advertised. The remaining 30% — around $60 billion based on a $40/ton tax — would be doled out to politically-favored constituents and used by the government to pay for administering the tax.

Businesses would not be eligible to receive any rebates. Their costs would rise and be passed on to consumers. This would damage American businesses’ global competitiveness by increasing the costs of exports.

To combat that damage to competitiveness, both CARA and the Climate Leadership Council promise a system of “border adjustments” for the carbon content of imports and exports. In other words, CARA would levy tariffs on imports and subsidize exports of “carbon-intensive” products. They argue these tariffs and subsidies would “enhance the competitiveness of American firms that are more energy efficient than their foreign competitors … and encourage other top emitters — such as China and India — to adopt carbon pricing of their own.

This is wishful thinking.

First, determining the carbon content of imported goods will be complex and controversial. For example, what is the carbon content of your smartphone? Most smartphones are manufactured overseas, but use components sourced from many different countries. Similarly, cars and trucks assembled here rely on thousands of parts from overseas. And many goods are shipped from one foreign country to another before being imported into the United States.

Keeping track of these transactions and assigning an accurate carbon value to every single component will be impossible, not least because the mix of energy resources used can change from day-to-day. For example, the electricity used to manufacture steel today may have a very different mix than the electricity used yesterday.

Third, although proponents argue that a border-adjustment complies with World Trade Organization rules, the WTO itself is less sanguine.

It is almost certain that the inherently arbitrary nature of the resulting carbon tariffs on imports and subsidies on exports would lead to trade disputes between the U.S. and other countries, imposing further economic damage on American consumers. The most likely outcome will be retaliatory tariffs on American exports — further damaging our businesses and consumers. China and India aren’t going to deny their citizens the benefits of economic growth by imposing huge carbon taxes on themselves.

The winners of the tax-and-dividend scheme — setting aside virtually every foreign power with which we compete economically — will be those who don’t use much energy, such as individuals living in large cities, and those with the financial means to take advantage of the myriad subsidies offered for electric vehicles, solar panels, and so on. The biggest losers will be everyone else, especially the millions of rural Americans in “flyover country,” – the same individuals who produce most of the energy we use, grow the food we eat, and manufacture many of the goods we purchase.

Perhaps not surprisingly, the single largest winner of the proposed carbon tax is likely to be Exelon Corporation itself. The company is the largest U.S. operator of nuclear plants, with about 19,000 megawatts of capacity, that generate around 150 million megawatt-hours of electricity each year.

With the carbon tax at its proposed starting value of $40/ton, even the most efficient natural gas generators would incur a tax of about $15 per megawatt-hour. By comparison, the average wholesale energy price in PJM, which operates the nation’s largest wholesale market, covering 14 states and the District of Columbia, for all of 2018 was about $38/MWh. The carbon tax on coal-fired plants, which still provide over one-fourth of U.S. electricity, would be much higher, over $45/MWh for a typical plant.

Because wholesale electricity market prices are set by the highest-cost generator needed to meet demand, electricity prices would skyrocket during periods of high demand, costing consumers and businesses hundreds of billions of dollars each year. Those higher prices will benefit Exelon’s bottom line. If the average wholesale price of electricity increased by only $20/MWh, Exelon’s profits would increase by around $3 billion per year. By comparison in 2018, Exelon’s total profits were $2.8 billion.

Finally, without comprehensive action by all countries, a carbon tax won’t have any measurable change on global climate. Without coordinated worldwide agreements to reduce carbon emissions, our efforts will be meaningless. By all means, let’s support and grow nuclear power in this country, which is highly reliable and emissions-free. But that can be done without wrecking the economy on the altar of climate change.

This piece originally appeared at the Washington Examiner


Jonathan A. Lesser, PhD, is an adjunct fellow at the Manhattan Institute, president of Continental Economics consulting, and author of the new report, “Is There a Future for Nuclear Power in the United States?

This piece originally appeared in Washington Examiner