The "Air Pollution Management" Newsletter

June 2008
No. 362

Carbon Tax is Exorbitant

There are a number of factors which will determine whether there is an exorbitant carbon tax. The word “exorbitant” implies a miscalculation. This may be the most important element of risk. We could somehow stumble into a situation where a carbon tax is so punitive that it has a great negative economic impact. However, the European experience is otherwise. In fact Europeans are more positive about coal-fired power generation as a long term solution than Americans are.

The Wall Street Journal observed in an April 26, 2008 article that Polls are cruel. Voters consistently say they want to stop global warming. They also say consistently that energy prices, especially for gasoline, are too high. Excerpts from this article follow.

“So what are politicians supposed to do? The answer, apparently, is to pretend the contradiction doesn't exist. The latest episode in this long-running bipartisan ruse aired last week, when John McCain proposed a "gas tax holiday" that would suspend federal levies between Memorial Day and Labor Day. "Americans need relief right now from high gas prices," a press release put it, and the holiday will "act immediately to reduce the pain." His Arizona colleague, Jon Kyl, promptly introduced it as Senate legislation.

Most of the price of gasoline is determined by the global price of crude oil, which is spiking now due to a combination of the weak dollar and commodity speculation. The source of the problem isn't the tax. Domestic demand for gas always goes up with summer driving, but the McCain holiday doesn't affect production, and anyway, only applies over the short term.

More notably, it makes a hash out of the climate-change policies that the candidate purports to favor. In 2003, Mr. McCain and Joe Lieberman introduced the first Senate bill to mandate greenhouse-gas reductions through cap and trade. "There is no middle ground," Mr. McCain said in 2005. "You've got to have an immediate effort to reduce emissions of greenhouse gases. Anything less than that, is a fig leaf and a joke."

As honest environmentalists admit, any effective policy to reduce emissions must increase the price of carbon, encouraging cuts in consumption and creating an incentive for competing energy sources. This is justified as a necessary sacrifice to avert "dire consequences if we let the growing deluge of greenhouse gas emissions continue," as Mr. McCain said last year.

But as the gas-tax moratorium gambit shows, such purity is dumped as soon as voters start complaining about high prices. Not that the Republican is alone:  Hillary Clinton, slipping into her new role as tribune of the working class, has endorsed the holiday, while Barack Obama is opposed because he believes a windfall profits tax on oil companies would provide more relief.

The evasions continue down the line. It is easy for everyone to say the U.S. needs a "Manhattan Project" for alternative energy because the phrase is meaningless. Most politicians favor a cap-and-trade regulatory policy, instead of a carbon tax, because it would shift higher emissions costs onto businesses, which would pass them on to consumers indirectly. Yet the most popular Senate bill that would create a cap-and-trade program applies only to utilities and industry. It excludes automobiles, though about one-third of annual U.S. carbon emissions come from cars and trucks.

Such contradictions are easy to paper over now, because big climate change legislation is still a way off in Congress. But it's becoming clearer all the time that whatever emerges will be so shot through with loopholes and exemptions that its effect on carbon emissions will be minimal, while still imposing economy-wide distortions.

No one could get elected, or for that matter govern on a platform that called explicitly for increased energy prices. So we get contradictions like a gas tax moratorium married to cap-and-trade carbon limits. To quote Mr. McCain, it's "a joke.” (End of WSJ excerpt).

It is instructive to review the history of natural gas power generation. The low cost of natural gas coupled with environmental pressures led to a huge building program of natural gas fired plants in the U.S. at the turn of the century.

The price of natural gas then rose substantially. The public essentially had the choice which was to utilize all this new gas-fired power generation and help reduce greenhouse gases or to switch back to the old coal plants.

The answer was that the independent gas turbine power providers went bankrupt because the public was unwilling to pay a substantial premium for cleaner energy.


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