How to sell a carbon tax

Remember that some taxes aren’t about generating revenue

John H. Cochrane

The Grumpy Economist

John H. Cochrane | Feb 06, 2019

Sections Public Policy

Collections Climate Change

When voters in Washington state roundly rejected a proposed carbon tax in November 2018, it was a grim moment for those who support carbon taxation not only in the Evergreen State, but anywhere else in the United States. Politics in Washington tend to lean strongly to the left—Hillary Clinton beat Donald Trump there by nearly 16 percentage points in 2016, and both senators and seven of 10 congresspeople are Democrats—and yet the carbon tax lost by a 12-point margin. Is carbon taxation the rare idea that liberals and conservatives can agree to hate? 

The key question about a carbon tax is: What do you get in return? More specifically, what does the government do with the money it collects? According to the Seattle Times, Washington’s carbon tax would have

taken effect in 2020, rising year after year to finance a multibillion-dollar spending surge intended to cut Washington greenhouse-gas emissions. The initiative reflected proponents’ faith that an activist government can play a key role in speeding up a transition to cleaner fuels.

The fee would have raised more than $1 billion annually by 2023, with spending decisions to be made by a governor-appointed board as well as the state’s utilities.

Perhaps the voters of Washington were not so much against a carbon tax per se, but rather had less than full faith that a large increase in green boondoggle spending by the state government was a good idea. They need only to look south at California’s high-speed train to see cost-benefit analysis at work in dollars per ton of carbon saved. Or perhaps thousands of dollars per ounce. 

Such spending violates the whole idea of a carbon tax, which is to give people and businesses an incentive to figure out their own ways to cut carbon emissions. The point is not to fund big government projects. If you want to fund big government projects, you do it out of the broadest-based and fairest tax you can find.

As Tyler Cowen suggested in a Bloomberg article after the vote in Washington state, for proponents of a carbon tax—including many economists—“maybe it’s time for a change in tactics. These new approaches might start with the notion that we can address climate change without transferring more money from voters to politicians.”

Here are three ideas for doing so:

Institute a revenue-neutral carbon tax. Use the carbon tax to offset other taxes. If the carbon tax were coupled with an explicit reduction in other taxes, it might help to convince people. If the carbon tax were coupled with the elimination of other taxes, it would help more. Taxes are like zombies: if you just lower the rates, they tend to come back. If you eliminate them entirely, perhaps requiring referenda for their reinstatement, there can be more faith that they won’t come back. Couple the carbon tax with elimination of, say, state property taxes, income taxes, or sales taxes.

And in the end, we all know taxes must equal spending. If you resolve not to spend more, you might convince voters there won’t be more taxes. Advertising the carbon tax as a substitute for carbon spending, thereby eliminating green boondoggles, would help to seal the deal. 

Send the proceeds back to the voters. Former Chicago Booth dean George Shultz and James A. Baker, both former US secretaries of state and the Treasury, advocated this solution in a 2017 Wall Street Journal op-ed: Write everyone a nice check. This ensures that the money doesn’t go to boondoggles, and it gives every voter a stake in keeping the scheme going. It is highly progressive, which Democrats should like. A large and bipartisan group of economists reiterated support for this proposal in a January 2019 Wall Street Journal op-ed.

A variation of this idea is one I suggested several years ago: rather than a tax, give each American a right to X tons of carbon emissions that they can sell on a carbon market. That also gives everyone an incentive to vote for the system. And it states the issue squarely: you, a voter, are having your air polluted. You have a right to collect on that damage. It makes it clear that carbon use results in a fee, a penalty—not a “tax.” The point is to disincentivize the use of carbon, not to raise revenue for the government to spend. “Tax” is a loaded word in American culture and politics; carbon rights takes the whole discussion away from a “tax.”

Trade the carbon tax for regulations. Institute a hefty fee, in return for elimination of all the other carbon subsidies and regulations. To those who don’t believe in climate change: OK, but our government is going to do all sorts of crazy stuff. Let’s cut out the rot and just pay a simple fee instead. No more electric-car subsidies—$15,000 from taxpayers to each Tesla owner in Palo Alto, California—or high-occupancy-vehicle lanes, windmill subsidies, rooftop solar mandates, washing machines that don’t wash clothes anymore (tip to US consumers: don’t buy any washing machine built since January 1, 2018), and so on and so forth.

I think on the left, the strategy has been to ramp up climate hysteria: if we just yell louder and demonize opponents more, the voters will buy it. No matter how much of a problem you think climate change is, let’s admit that’s not working. In part, the claims are now so over the top that everyone can tell it’s gone too far. No, the way to put out fires in California is not to build a high-speed train.

When, in the name of science, the Intergovernmental Panel on Climate Change writes things like this, right up front in the executive summary of a 2018 report . . .

D6. Sustainable development supports, and often enables, the fundamental societal and systems transitions and transformations that help limit global warming to 1.5°C. Such changes facilitate the pursuit of climate-resilient development pathways that achieve ambitious mitigation and adaptation in conjunction with poverty eradication and efforts to reduce inequalities (high confidence). 

D6.1. Social justice and equity are core aspects of climate-resilient development pathways that aim to limit global warming to 1.5°C. . . .

D7.2. Cooperation on strengthened accountable multilevel governance that includes non-state actors such as industry, civil society and scientific institutions, coordinated sectoral and cross-sectoral policies at various governance levels, gender-sensitive policies . . . (high confidence). 

D7.4. Collective efforts at all levels . . . taking into account equity as well as effectiveness, can facilitate strengthening the global response to climate change, achieving sustainable development and eradicating poverty (high confidence).

. . . you can’t blame the suspicious Washington voter for wondering if perhaps a larger agenda isn’t being financed here.

There is a sensible middle. There are voters who want to do something about carbon that doesn’t involve financing massive boondoggles or a collectivist progressive agenda. There are environmentalists who want to do something about carbon that actually will work. There are skeptics who understand that as long as we’re going to do something, we should do it efficiently via a carbon fee rather than at massive cost, as we are doing now.

Politicians and environmental advocates who really want to reduce carbon emissions should start looking for solutions, like those above, that might appeal to this centrist element. Because carbon taxation to finance massive green spending, at least as it was pitched to the Washington electorate, certainly doesn’t.

John H. Cochrane is a senior fellow of the Hoover Institution at Stanford University and distinguished senior fellow at Chicago Booth. This essay is adapted from a post on his blog, The Grumpy Economist.