The Greening of the Republicans?
By Thomas G. Donlan
Now that the U.S. has a new abundance of domestic oil and natural gas, what could be more natural than to tax it? As Ronald Reagan sarcastically summed up traditional government policies, “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
Thus, five Republican elder statesmen calling themselves the Climate Leadership Council have issued a call to their party to support a carbon tax, though most Republicans in Congress, and their new president, are still very skeptical of anything involving a new tax.
Fully aware of the Republican allergy to taxes, the new carbon-tax planners propose paying all of its revenue back to the people. This may sound like the exercise wheel in a squirrel cage, but hear them out.
The proposition is to tax carbon-bearing fuels, primarily oil, natural gas, and coal, at the mine, the refinery, the dock, or wherever the fuel first enters the U.S. economy. The council suggests a new tax starting at $40 on each metric ton of carbon.
Consumers Pay All Taxes
This tax would drive up the price of those fuels for intermediate users such as utilities, refiners, transporters, and manufacturers. The cost would be passed on to consumers in the form of higher prices. In the longer run, consumers would face an incentive to reduce their use of fossil fuels.
In the short run, consumers would scream about the high cost of everything, so the plan calls for returning all of the carbon-tax revenue to consumers and to fossil-fuel exporters.
From the starting rate of $40 a ton, the tax rate would be adjusted up to achieve the same reductions in carbon emissions that current restrictive regulations, including the Obama administration’s Clean Power Plan, might have achieved. The regulations would then be eliminated, according to the proposal.
The five big names in the Climate Leadership Council are former Treasury secretaries James Baker, Henry Paulson, and George Shultz, and former chairmen of the Council of Economic Advisers Martin Feldstein and Gregory Mankiw.
The council’s founder, president, and CEO, Ted Halstead, however, is a green independent, co-author of a book called The Radical Center: The Future of American Politics. He previously started and ran a foundation called New America. Other council members include Thomas Stephenson, a partner at Sequoia Capital in Silicon Valley, and Rob Walton, former chairman of Wal-Mart Stores.
Readers may feel political and cultural tension in the council’s manifesto. We can imagine that every word was negotiated between climate-change worriers and climate-change skeptics. As the preamble says:
“While the extent to which climate change is due to man-made causes can be questioned, the risks associated with future warming are too big and should be hedged. At least we need an insurance policy. For too long, many Republicans have looked the other way, forfeiting the policy initiative to those who favor growth-inhibiting command-and-control regulations, and fostering a needless climate divide between the GOP and the scientific, business, military, religious, civic, and international mainstream.”
So the council has attempted to square the circle, presenting a plan it says is based on sound economic analysis, embodying principles of free markets and limited government. It could “strengthen our economy, benefit working-class Americans, reduce regulations, protect our natural heritage, and consolidate a new era of Republican leadership.”
Baker, who is also a former secretary of state and White House chief of staff, is certainly the most successful Republican political operative of his generation. He stands behind the proposal “both from a policy standpoint and a political standpoint.”
Baker disclaims any certainty about the prospect of climate change, adding, however, that “it’s a risk we shouldn’t have to take.”
He adds that Republicans should take climate change seriously. “We’ve been basically skeptics or deniers. When you have companies like BP, Exxon, and Total and Shell all saying we ought to have a carbon tax of some sort, I think we ought to listen to that.”
The political benefit is speculative, pinned to the idea that climate-change skeptics are changing their minds or dying off, while young Americans are more concerned, as are African-Americans and Hispanics.
“A carbon-dividends plan offers an opportunity to appeal to all three key demographics, while illustrating for them the superiority of market-based solutions,” Baker says.
The power of a carbon tax is also its biggest political problem: It can raise vast funds for the government—at the expense of consumers and general prosperity. A value-added tax, a goods-services tax, a sales tax, a border-adjustment tax, an energy tax, and a carbon tax all have this in common. Only the retail sales tax has ever gotten traction in the U.S., and only at the state and local levels.
At the suggested starting rate of $40 per ton of carbon, the tax would raise $300 billion of federal revenues a year. From the consumer’s point of view, it would raise the price of gasoline by about 36 cents a gallon.
The offset: Every American with a valid Social Security number would receive a rebate of about $500 a year. But what is the point of inventing a new tax if you have to use the revenue to buy off the opponents?
In Search of Efficiency
The carbon tax could be a highly desirable improvement in the U.S. fiscal system. Unlike most federal taxes, it would be an incentive for economic efficiency. As Reagan advised, “If you want less of something, tax it,” and the U.S. should not waste irreplaceable national fossil-energy resources.
The rebate, however politically necessary it may be, is fiscal nonsense. A country that runs $500 billion deficits can’t afford to create another income-redistribution program.
To put the U.S. on a path that lowers the ratio of debt to gross domestic product, the government will have to raise revenues somehow. Congressional Budget Office figures show that just to reduce the ratio from the current 77% to 70% would require more than $5 trillion in new revenues over 10 years—and that only if Congress strictly refuses to cut other taxes or start new spending programs.
Faster economic growth is the best medicine, and creating a more efficient and productive economy—even with a new tax.
You can view the full Barron’s editorial endorsement here.