The carbon tax is back, sort of. A possibility has emerged that the tax will be folded into the budget reconciliation bill. It’s almost certainly a political feint rather than a serious proposal, and we don’t know very much about what sort of carbon tax is under discussion. But political feints have been known to become law—the entire field of sex-based discrimination law is based on one.
I’m not saying a carbon tax is going to happen. I’m not even saying it’s likely to happen; it’s not. But it’s dimly possible that it may happen, just as, back in 1964, the reactionary House Rules Committee Chairman Howard Smith blundered into outlawing discrimination based on sex (and, eventually, sexual orientation and gender identity). Smith thought smugly that he was killing off the Civil Rights Act by adding sex as a protected category. Instead, he helped create second-wave feminism.
In this instance, the supremely exasperating Senator Kyrsten Sinema just might stumble into legislating a tax to curb carbon emissions. The United States would address the climate crisis in a very serious way for the very first time.
Or not. Here’s the backstory.
The Biden administration is trying to move what is conventionally described as a 10-year, $3.5 trillion spending package through Congress, accompanied by a 10-year, $2.9 trillion tax package. TNR’s Michael Tomasky aptly describes this as a $60 billon-per-year net investment increase (Mike hates the word spending!) that represents a budget increase of less than 1 percent. But even a $290 billion-per-year tax hike is proving a hard sell to Sinema. According to The New York Times’ Jonathan Weisman and Coral Davenport, the “iconoclastic Arizonan” won’t, “at least for the moment,” countenance the tax package’s proposed increases in personal or corporate income-tax rates, according to Democratic sources. So Senate Majority Leader Chuck Schumer directed the Finance Committee to fashion a carbon tax.
Why a carbon tax? Because Sinema claims to be all about curbing climate change. In a rare September 23 interview with the Arizona Republic, Sinema talked up the climate change provisions in the infrastructure bill. “In Arizona,” Sinema told the paper,
we’re all too familiar with the impacts of a changing climate … from increasing wildfires to the severe droughts, to shrinking water levels at Lake Mead, damage to critical infrastructure—these are all the things that we’re dealing with in Arizona every day.… We know that a changing climate costs Arizonans. And right now, we have the opportunity to pass smart policies to address it—looking forward to that.
To judge from this interview, a carbon tax should be extremely, well, Sinematic. But Sinema is on record condemning the carbon tax as “detrimental to the United States economy,” and West Virginia Senator Joe Manchin, the Democratic caucus’s other problem child, is even less likely to support one because he represents a coal state. Manchin’s already griping about other climate items included in the reconciliation bill, including a “clean electricity standard” to move utilities toward renewable energy sources.
An unlikelier obstacle is President Joe Biden. Biden has pledged not to raise taxes on anyone earning less than $400,000. That was dumb, because people earning less than $400,000 comprise no less than 98.2 percent of the U.S. population, among them many people one may describe very accurately as rich. Nonetheless, that’s what Biden promised. And Senate Finance Committee Chairman Ron Wyden told the Times that his marching orders from Schumer are not to violate Biden’s pledge in crafting a carbon tax.
In a literal sense, keeping Biden’s promise shouldn’t be hard. A carbon tax isn’t a consumption tax; it’s levied on energy producers. That makes it analogous to the corporate tax increases Biden proposed.
A political problem arises, though, if the energy producers pass the carbon tax’s cost on to consumers. This isn’t likely to happen with coal, because coal companies typically sell to utilities, not consumers. Rather than pass higher coal prices on to consumers, utilities would probably accelerate their switch to cleaner fuel sources. Natural gas producers wouldn’t likely pass much cost on to consumers either, because burning natural gas emits much less carbon than burning coal or oil.
But oil companies almost certainly would pass the carbon tax’s cost on to consumers, in the form of higher gasoline prices. A carbon tax would likely therefore be seen, fairly or not, as a violation of Biden’s pledge.
In a prepared statement, Wyden said:
I’m developing legislation that would make polluters pay for the costs of the climate crisis, with a substantial portion of the revenue returned directly to the American people through cash payments.
What Wyden means is that his proposal will include rebates. When you rebate a carbon tax, you blunt its effect on consumers. That’s good to the extent that it corrects the regressive effect of the carbon tax, which is to increase gas prices. But it’s bad to the extent that it removes economic pressure on consumers to drive less or to switch to electric vehicles. Which is no small reason to have a carbon tax in the first place.
If Wyden finds a way to rebate the carbon tax’s effect on the entire 98.2 percent of the public on whom Biden promised not to raise taxes, it will hardly be worth imposing the tax at all. Consequently, there’s a decent likelihood Wyden will exempt oil companies from any carbon tax the Senate Finance Committee proposes. (Maybe that political circumstance explains why the oil companies’ chief lobby group, the Petroleum Institute, recently said it would support a carbon tax.)
According to the Times, Wyden is contemplating a carbon tax of $15 to $18 per metric ton, rising gradually after that to some unspecified target. The Times quoted a study by Resources for the Future that found a carbon tax that started at $15 per metric ton and rose to $50 over the next decade could reduce carbon emissions by 44 percent over 2005 levels. But that study didn’t factor in the effect of rebates or a possible exemption for the oil industry. A murderer’s row of conservative Republicans, led by James Baker and the late George Shultz, proposed three years ago a much bolder carbon tax that started at $40 per metric ton, though they wanted regulatory concessions in return. (For a good review of carbon-tax proposals, I recommend this 2019 piece by Marianne Lavelle in Inside Climate News.)
In July, The Atlantic’s Robinson Meyer published an obituary for the carbon tax. Fully 3,589 economists, Meyer wrote, have pronounced a carbon tax “the most cost-effective lever to reduce carbon emissions.” (That’s up now to 3,623.) But citing George Washington University political scientist Nina Kelsey, Meyer pointed out that no country with a major fossil fuel industry ever instituted a carbon tax (or any other carbon-pricing policy, such as cap and trade). The sole exception was coal-rich Australia, which later repealed it. “We have done extensive polling on carbon tax,” Hillary Clinton’s campaign chairman John Podesta wrote in one of the emails Wikileaks published shortly before the 2016 election. “It all sucks.”
Maybe so. But I’m not ready to bury the carbon tax. The reconciliation bill probably won’t include any carbon tax at all. If it does, it probably won’t be a particularly great carbon tax. But the possibility still merits our attention. Time is running short, and we have to start somewhere.
