Tax Analysts Blog

Should CEOs Lobby for a Carbon Tax?

Posted on Nov 26, 2012

It seems like a million years ago that John McCain was a leading advocate of cap-and-trade, the economic equivalent of a carbon tax. In 2003 he said: “It is time for the United States government to do its part to address this global problem, and a discussion of mandatory reductions is the form of leadership that is required.” But in recent years the popularity of a carbon tax or cap-and-trade legislation has been dropping like a stone. Now even liberal Democrats are backing away from the idea.

Lately, however, there has been a little spurt of renewed interest in carbon taxes. This is due to three factors: (1) President Obama's victory and his debt to big-money environmentalist contributors; (2) the absence of any concrete alternatives for raising taxes despite the unprecedented need for more revenue (notice that even post-election everybody is still extremely vague about what "loopholes" they will close); and (3) the widespread belief that global warming brought Hurricane Sandy's devastation to the Northeast.

As almost any economist will tell you, a carbon tax is an excellent idea. Unlike other taxes that create damaging distortions to the free market, this tax corrects damaging distortions created by the free market.

But Democrats have botched the whole thing by trying to be too cute. First, instead of being honest with the public, they tried to minimize the downside of putting a price on emissions with zealous advocacy of complicated cap-and-trade proposals (that technically were not taxes). This has achieved nothing politically as the Republicans readily saw through the disguise and simply called the Democratic proposals "cap-and-tax."

Second, Democrats argue cap-and-trade creates "jobs, jobs, jobs, and jobs" (a quote from Nancy Pelosi in Robert Draper's new book). Yes, it does create green jobs in solar, wind, and alternative energy. But basic economics tell us that the job creation in the green sector is offset by job losses in the rest of the economy that faces higher energy prices as a result of the tax.

The reason to enact a carbon tax is to reduce carbon emissions that in turn will reduce the rate of global warming. As with any anti-pollution legislation we must pay for that with a loss of traditional industrial output and conventionally measured economic growth. Democrats should focus on the real merits of a carbon tax because in this long debate the public can see through the lies.

Meanwhile, Republicans' reflexive aversion to taxes is blinding them to many features of the tax that are consistent with traditional Republican policies. Now that many Republicans are looking to raise taxes, they must engage in a thought process they have been avoiding for at least a decade. If taxes must be raised, how should it be done? In other words, what tax is least offensive to Republicans?

A carbon tax must be high on their list. Once the tax is imposed, government can step aside--drop ALL regulations and ALL tax incentives designed to reduce carbon emissions--and with this single market correction in place let the markets take over from that point onward and find the most cost-effective ways of reducing carbon emissions.

Professional partisan politicians have made a mess of the carbon tax debate. It is time for corporate CEOs to use their influence with the Republican Party to urge a reasoned approach to tax and environmental policy. They should fire their short-sighted lobbyists and think big. It would be in long-term interest of business and--as economists will tell you--the nation if a carbon tax were adopted in exchange for lower corporate taxes and less government regulation on carbon emissions.

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