Tax Analysts Blog

Why Some Republicans Want to Tax Carbon – and Give the Money Back to You

Posted on Feb 16, 2017

Carbon taxes are toxic, at least to most Republicans. But last week, a handful of GOP wise men, including several former Treasury secretaries, offered a challenge to party orthodoxy. Their plan? To impose a new carbon tax but refund the money to taxpayers before politicians get a chance to spend it.

Developed by the new Climate Leadership Council (CLC), this plan for a refundable carbon tax is new but not exactly novel. Similar plans for rebated energy taxes have been kicking around for decades, with notably little success.

That’s too bad, because the idea merits serious consideration. It’s especially relevant as Republicans contemplate a wholesale rollback of environmental regulations. As the CLC points out, such regulations can be heavy-handed and inefficient. But they also represent the nation’s most important response to climate change.

At least so far.

In its position statement, the CLC throws a bone to climate change skeptics, suggesting that the man-made contribution to climate change is open to debate. But the group underscores the responsibility of Republicans – as the new governing party – to grapple seriously with undeniable evidence that climate change is happening.

“For too long,” the group warns, “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.”

A refundable carbon tax could fix all that, the CLC claims. “Such a plan could strengthen our economy, benefit working-class Americans, reduce regulations, protect our natural heritage and consolidate a new era of Republican leadership,” it says.

Four Steps

The CLC plan includes four key elements.  It begins with a gradually increasing tax on carbon emissions, initially pegged around $40 a ton but rising over time.  Such an escalating tax would send “a powerful signal to businesses and consumers, while generating revenue to reward Americans for decreasing their collective carbon footprint.”

Second, the CLC would refund all revenue collected by the carbon tax to American taxpayers “on an equal and quarterly basis via dividend checks, direct deposits or contributions to their individual retirement accounts.” Initially, a family of four could expect roughly $2,000 in “carbon dividend payments,” but reimbursements would rise gradually in tandem with the carbon tax rate.

Third, the new carbon tax would be border adjusted in order to “protect American competitiveness and punish free-riding by other nations.”  As the CLC explains, “exports to countries without comparable carbon pricing systems would receive rebates for carbon taxes paid, while imports from such countries would face fees on the carbon content of their products.”

Fourth, the new carbon tax would be coupled with a dramatic rollback in environmental regulations. “Much of the EPA’s regulatory authority over carbon dioxide emissions would be phased out,” the council writes, “including an outright repeal of the Clean Power Plan. Robust carbon taxes would also make possible an end to federal and state tort liability for emitters.”

This last item is catnip for Republicans. And the CLC plan has the potential, at least, to win support from Democrats, too.  After all, what Democrat doesn’t like a carbon tax?

But like many schemes designed to satisfy everyone, the CLC outline seems likely to please no one.

Carter’s Folly

History supports that skepticism. The last serious attempt to impose a refundable energy tax came in 1977, when President Carter proposed a "standby gas tax" to help address the nation’s energy crisis. As explained in a piece I did for the Tax History Project,  Carter’s plan “would have added 5 cents to the federal gas tax in every year that Americans failed to meet new, lower targets for gasoline consumption. If the country missed the target one year, the tax would go up. But if it hit the target the following year, it might actually go down.”

The crucial element of Carter’s new tax – and the root of its political appeal – was its refundability. Any new revenue collected by the standby gas tax would be returned to taxpayers through a credit against their income tax liability.

However, Carter’s refundable gas tax drew substantial comment but little support. Republicans were especially dubious that new revenue would be completely refunded to taxpayers.They might be forgiven their doubts, given the mixed signals coming from the White House about the promised refundability. "We still have to have some flexibility about exactly what we do," Carter told reporters of his plans for new gas tax revenue. Anonymous leaks from the White House also suggested that at least  some of the revenue might be spent on new initiatives, including broader tax reform.

Republicans were having none of it. "To be blunt about it," said Republican National Committee Chair William Brock, "Mr. Carter's energy program looks suspiciously like a backdoor way of raising enough taxes to pay for more government programs and still balance the budget."

Ultimately, Carter’s gas tax failed to win any serious traction on Capitol Hill. It was doomed by the vagueness of its promised refundability. 

There’s a lesson in Carter’s failure. Liberals often want their taxes – and especially their Pigouvian taxes designed to compensate for negative externalities – to do everything: raise money, curb bad behavior, and fund worthy spending programs. That would be nice, but it’s not the way those taxes usually work. More often, grand ambitions lead to speedy failure. In Washington state last year, voters rejected a plan to impose a refundable carbon tax, thanks in part to divisions within the environmental community. Some green activists were eager to impose the new carbon tax and declare victory for the environment. Others were less than enthusiastic about returning revenues to taxpayers, instead arguing for new spending on renewable energy, mass transit, and similar pro-environment programs.

Ultimately, none of the Washington environmentalists got any part of what they wanted.

Eyes on the Prize

A refundable carbon tax is a good idea. But to make it work, the refundability has to be real. That may seem obvious, but it isn’t, at least for environmentalists. After all, it makes some intuitive sense to spend carbon tax revenues on other programs designed to battle climate change.

But it doesn’t make political sense. Selling a new tax is always hard, even in the best of times. But it’s even harder when you ask too much of your new fiscal innovation.

Environmentalists should embrace the idea of a fully refundable carbon tax. It might not be perfect, but it would be very good: a major victory in the fight to slow climate change. And if they manage to get it, environmentalists should call it a win and move on to new initiatives (like spending more money on renewable energy and mass transit).

Better to have two tough but winnable fights for something “good enough” than a single, gigantic fight for something “perfect.”

For more tax talk follow me on Twitter @jthorndike.

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Read Comments (3)

Edmund DantesFeb 16, 2017

"Initially, a family of four could expect roughly $2,000 in “carbon dividend payments,” but reimbursements would rise gradually in tandem with the carbon tax rate."

Sure, and Obamacare will save the average family $2,500 in health insurance premiums. They must really think the voters are ignorant rubes it they think that political fraud is going to fly again.

The only case I'm aware of where a state kept a promise to return tax money to taxpayers is from the excess revenue raised by the Colorado marijuana tax. And that only was because of a constitutional amendment passed by initiative years earlier; even so, the politicians tried to worm out of it.

The reality is that the sunspots are disappearing, and we are heading into a long period of global cooling. The carbon tax would be a pointless anchor upon economic growth, and should be rejected.

Mike55Feb 16, 2017

I completely agree with your point that step #2 would never work as currently described. However, I nevertheless think we ought to cut the authors some slack.

"Carbon dividend payment" strikes me as something that was carefully designed to attract as little attention and cause as little offense as possible. I very much doubt the authors really view that as being the best way to ensure the carbon tax proceeds stay out of the U.S. Treasury coffers. I'm guessing they instead just wanted to avoid triggering a rhetoric battle that would overshadow the real points they wanted to make. Say "credit" or deduction" and you lose those on the left. Say "redistribute" or "transfer" and you lose those on the right. Say "carbon dividend" and people are just left confused, and (hopefully) will read through the rest of the article.

Mike55Feb 16, 2017

I was very impressed by the CLC's clever plan: it manages to completely avoid the debate around whether there is a causal relationship between man-made carbon emissions and climate change.

So you think global warming is a myth? Ok, fine, you arguably still come out ahead with this. Not only do you recoup the higher prices you'd pay, but you also get to remove environmental rules that (as a non-believer) you must surely deem to be hugely wasteful. Think global warming is the #1 threat to human existence? Great, here's your best chance to actually do something meaningful about it.

The single biggest problem with this plan is that it's a thoughtful, pragmatic, moderate solution. The authors clearly overestimated both parties when it comes to environmental issues. Each side abandoned environmental politics to the very worst fringe elements of their base over a decade ago now, so there's no hope for compromise left. I mean let's be honest for a moment here: can anyone picture Jim Inhofe sitting down with a bunch of WWF proponents and even having a productive discussion, much less a meeting of the minds?

Perhaps once some permanent solution (or at least long-term stalemate) is achieved on healthcare and immigration thought leaders from both sides of the aisle will turn their attentions to environmental matters. Until then, it's all going to remain pure brinksmanship between those on the fringe.

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