Is the Conservative-Friendly Carbon Tax a Regressive Flat Tax In Disguise?

What’s wrong with this picture? Conservatives, such as the members of Wall Street Journal's editorial board, are talking up a carbon tax instead of a market-based system to address climate change. These are the folks whose favorite refrain is "no new taxes." What gives?

The choice between a cap-and-trade system and a carbon tax is not obvious. Taxes appear to be more transparent and simpler but do not guarantee a decrease in emissions over time. Cap and trade is admittedly more complex, and, in the midst of a market meltdown, that complexity is vexing. But what a cap and trade does do, if implemented properly (and that's a big if), is provide environmental certainty by mandating specific decreases in emissions by certain dates. It also allows markets to find the cheapest alternatives through the trading of emissions allowances. (More details here [pdf].)

Cap and Trade's Popularity Grew Out of Its Successes

Way back in the Clinton days, much of the discussion focused on taxes such as the BTU tax proposed by Vice President Al Gore, which aimed at taxing the heat content of fuel. But by the end of the 1990s cap and trade had gotten the upper hand. Why? Three reasons come to mind immediately:

• the success of cap and trade in lowering emissions of acid-rain-inducing sulfur oxide and nitrogen oxide from power plants at costs well-below projections,
• the nation’s growing belief in the market’s ability to find the most effective and least expensive solutions, and
• the very real perception that a carbon tax was politically untenable - that the American public would not accept a new tax.

By the time the Lieberman-Warner Climate Security Act of 2008 hit the Senate floor last spring, a solid alliance in favor of cap and trade appeared to be in place -- an alliance that spanned the array of politically diverse environmental organizations and corporate America. (See USCAP's letter [pdf] to Senate.)

Cap and Trade Loses Its Appeal

That was then. These days, the cap-and-trade alliance is in tatters. And what bad timing. For the first time, with a Democratic majority in Congress and Obama in the White House, there's a real possibility that a climate bill could become law.

But with this new reality and no doubt as a result of the ongoing market debacle, the environmental community is splintering into cap-and-trade and carbon-tax camps. Not surprisingly, the more left-leaning elements of the community tend to favor taxes (see here, here [pdf], and here) while centrists tend to favor markets.

Conservatives Favoring a Tax?

It’s one thing when Ralph Nader comes out in favor of a carbon tax, but conservatives? Here are just two cases in point:

• Staunch conservatives Bob Inglis (R-SC) and Arthur Laffer, a former member of President Reagan’s Economic Policy Board, argued in the New York Times in favor of a carbon tax, albeit a revenue-neutral one; and
• The predictably conservative, there’s no-global-warming-so-no-need-to-do-anything editorial board of the Wall Street Journal recently opined that “a (carbon) tax would be the least painful way to get” to a fix. For some reason the WSJ editors believe that a cap-and-trade system using the market to find the least expensive pathways to reducing emissions would lead to “market distortions caused by subsidies and regulation.”

So what’s going on? Have conservatives seen the light? Are they joining hands with liberal environmentalists to save the world from climate change? Probably not.

Carbon-Tax Support As a Backdoor Entry to Other Policy Goals?

Some of my colleagues believe it’s the poisoned pawn ploy – since taxes are not viable politically, kill climate legislation by favoring a carbon tax.

I have a different hunch. First, note that the carbon tax favored by these conservatives is “revenue neutral.” Read their pieces and decide for yourself, but to me their form of revenue neutral means substituting revenues from our current income tax system with those from a single-rate tax tied to the fossil-carbon content of consumer products – essentially a sales tax. But sales taxes are notoriously regressive – they place disproportionate burdens on lower income brackets. So their solution is essentially substituting a carbon tax, which is actually a regressive sales tax, for our progressive income tax system.

Coincidentally, Inglis and Laffer just happen to favor replacing our progressive tax system with a more regressive one (see here and here). Inglis has earned the Citizens for Tax Justice's highest rating for his opposition “to progressive taxes,” and Laffer is a highly vocal proponent of the flat tax that would replace our progressive tax system with a single tax rate for all Americans.

Now, a revenue-neutral carbon tax could be made progressive – it depends upon how the revenues are returned to the taxpayers - for example, using a tax and dividend approach [pdf]. But I suspect that that is not what the Wall Street Journal and Messrs. Inglis and Laffer have in mind. Before getting too excited about a new liberal-conservative alliance on climate change I'd recommend looking that gift horse in mouth – with just a sleight of hand, that carbon tax could end up achieving public policy goals that have nothing to do with fixing climate change.