The Conservative Case for Taxing Carbon Emissions

Financial Times

As tough sells go, trying to interest the Republicans in the US Congress, or Donald Trump’s White House, in a new federal tax on carbon is a doozy. Nonetheless, Republican grandees and economists are trying to change the debate on climate change in the face of skepticism from their own party.

The timing is not propitious. The authors, who include former secretaries of state James Baker and George Shultz, may have been expecting to deal with a President Clinton and a Republican minority in Congress. All the same, the main thrust of their proposal deserves support.

There is nothing intrinsically statist about correcting a price to incorporate the true costs of production — in this case, the environmental cost of carbon emissions — while leaving the wider market untouched. Accepting that principle would make intelligent economics, rather than ideology, the underpinning of the US approach to climate change.

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In theory, a carbon tariff should work well. It deals with concerns that raising levies on carbon-intensive production will simply push it abroad to countries where it is not taxed, leading to a loss of competitiveness for taxed industries without helping the environment.

In practice, though, a carbon border tax could be fiendishly hard to implement. Agreeing a consistent methodology for pricing carbon emissions will be problematic. Moreover, if carbon pricing is based on country-by-country estimates of emissions, a border tax will give a competitive advantage to cheaper, dirtier producers rather than more expensive, cleaner ones within each country. And mechanisms will need to be invented to track the carbon content and pricing of a product at each point in the supply chain to make sure taxes at the import destination are fair and equitable. In truth, if enough international political will existed to create a viable and legal border tax, it might be easier to harness that will to construct a consistent system of carbon pricing, and make the tax unnecessary.

There are one or two other problems with the grandees’ proposal. It contains a sweetener for those concerned about higher taxes — a rollback of other government controls affecting the energy sector. However, if that deregulation reduces constraints on emissions of other greenhouse gases such as methane, it will undo the positive effect of the carbon pricing element.

Still, the overall thrust of the plan is right. Human-caused climate change is real, and imposing some kind of price on carbon emissions is the best way to address it. The resistance the proposal will face in the White House and Congress says more about political short-sightedness and the power of lobbyists than the wisdom of the idea itself.

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