Stephen Cohen posted on the Energy Collective about whether a carbon tax is political feasible in the current environment. He argues that Republicans are likely to block any such attempt, and instead proponents should focus on efforts to reduce the costs of renewables and non-fossil alternatives. He’s particularly interested in the problem of making the purchase of renewable energy in all forms accessible to lower income groups. He proposes that R&D efforts be increased to achieve that goal.
I see two problems with this approach. First is that it’s not clear the achieving increased R&D investment is any more feasible given likely GOP resistance. Even if the solar R&D investment program was successful on net, the prominence of the Solyndra failure stands in the way.
The second is that failing to internalize the social cost of carbon emissions can lead to future distortions. The biggest problem is not so much the subsidies themselves, which may be justified on a short run basis to spark a market, but rather the difficulty of ending them when they are no longer needed. In one example, California’s Central Valley Project provided subsidized water to farmers with contracts with 40 year terms. The original subsidies were supposed to expire at the point, but the 1992 Central Valley Project Improvement Act provided for renewal of those contracts on similar terms, which was actually expected by farmers for many years prior. Those subsidies were capitalized into land prices and eventually captured by the landowners resulting in a large wealth transfer from tax payers. While the “average” price of water now likely reflects the opportunity cost of water, the marginal price of that water is still below the actual true cost, and farmers still don’t have as strong of an efficiency signal as they should. (In contrast, State Water Project and groundwater pumping costs have little or no real subsidies.) This illustrates how a subsidy has long outlived it’s usefulness and the extreme difficultly in ending them when a political constituency is created.
As a counter point, Martin Weitzman proposes that a carbon tax be created essentially through the backdoor of tariff negotiations. Weitzman points out the difficulty of negotiating quantity targets through such instruments such as the Kyoto Protocol. In contrast, successful tariff negotiations are the norm in the World Trade Organization. The President conducts those negotiations with relatively more independence, even as the current controversy over the Trans-Pacific Partnership has highlighted the exceptions to the rule. That implies that a carbon tariff probably can make it deeper into the federal legislative process than a straight up carbon tax, and the probability of a successful outcome increases significantly.
British Columbia appears to have a positive experience with a carbon tax imposed in 2008 that rebates all of the proceeds back to taxpayers. http://www.nytimes.com/2016/03/02/business/does-a-carbon-tax-work-ask-british-columbia.html
We already have a carbon tax in California courtesy of the Air Resources Board, which claimed it has the authority under AB 32 to impose the tax through the sale of “indulgences” for the oil and manufacturing businesses in the state to continue to emit carbon. They call the tax carbon emissions credits which are “auctioned” every month and generate billions in revenue that the state is using for all sorts of purposes including high speed rail construction and highways. NRDC estimated that the tax would produce $8 billion per year and the latest returns from the auctions looks like it will produce even more revenue. The companies that buy the credits simply pass the cost along to their customers–one of the reasons that gasoline in California costs close to a $1 per gallon more than in the rest of the nation.
This is technical discussion about the difference between a tax which is a specified dollar amount versus cap and trade of allowances. Sale of allowances is akin to the sale of radio spectrum via auctions by the FCC. Whether a government agency raising funds via an auction is a “tax” is a legal question beyond this blog. However, that would raise questions about whether other auctions such as BLM oil and gas lease auctions are a tax, or even if sale of government property is a “tax.” It also raises the question of whether water transfers, in which water is declared the property of California not individuals in the state constitution, create a tax as well. By painting too broadly with the term “tax” we can undermine the power of the marketplace to more effectively allocate resources.