I have the greatest respect for Jim Baker, Ronald Reagan's most effective chief of staff, and for George Shultz, Greg Mankiw, Martin Feldstein and other Republican worthies with substantive Washington experience on "The Climate Leadership Council." But they have all signed on to "The Conservative Case for Carbon Dividends." (A more straightforward title would be "The Case for a Carbon Tax.")
The Council has been created "to mobilize global opinion leaders around the most effective, popular and equitable climate solutions." The central premise behind the initiative is:
"Mounting evidence of climate change is growing too strong to ignore. While the extent to which climate change is due to man-made causes can be questioned, the risks associated with future warming are too big and should be hedged."
The proposal envisions a carbon tax starting at $40 a ton and increasing "steadily over time." It would be levied "at the refinery or the first point where fossil fuels enter the economy, meaning the mine, well or port." It is assumed that the tax would discourage carbon emissions and therefore reduce increases in climate temperatures. This would permit costly "command and control regulation" to be significantly relaxed, offsetting to some extent, the carbon taxes.
All tax proceeds "would be returned to the American people on an equal and quarterly basis via dividend checks, direct deposits or contributions to their individual retirement accounts." Under this arrangement, "a family of four would receive approximately $2,000 in tax-free payments . . . the first year."
Sounds good. Too good.
The Council's proposal is theoretically satisfying but largely ignores the sausage machine of the U.S. legislative process, and is likely to have substantial unanticipated negative consequences for wide sectors of society. However, there is recognition of how managing the resulting tax revenue could (is likely to?) get out of control:
"It is essential that the one-to-one relationship between carbon tax revenue and dividends be maintained as the plan's longevity, popularity and transparency all hinge on this. Allocating carbon tax proceeds to other purposes would undermine popular support for a gradually rising carbon tax and the broader rationale for far-reaching regulatory reductions."
This carefully-worded caveat identifies the problem but provides no substantive assurance that a one-to-one balance between revenue and dividends can be maintained.
Variants of a carbon tax scheme have been implemented so far in California, Canada, Australia and Europe. Spending the proceeds is a politician's delight. Take a look at California's goody list which includes today's "must have" – affordable housing. Then there is the 25% of proceeds ($707 million so far) that are spent on one of the biggest boondoggle projects ever – a bullet train between San Francisco and Los Angles. That project's first stage is currently running seven years behind schedule and more than $3 billion over budget.
In the case of Australia's carbon tax, whose 2012 law lasted all of two years, consumer price increases as well as 1,000 pages of legislation helped put an end to that effort. Repealing the tax, the Australian Treasury found, would "boost Australia's economic growth, increase jobs and enhance Australia's international competitiveness by removing an unnecessary tax, which hurts businesses and families."
Even if a carbon tax was initially levied without exemptions and 100% of carbon tax revenues were distributed in cash to everyone, our legislative process will not permit that pristine arrangement to survive for long. "Special situations," natural or man-made disasters, disruptive budget deficits or some other event are sure to erode the integrity of the legislation. In short, we should not let the theoretically satisfying outcomes of a virgin carbon tax ride herd over the highly likely political "adjustments" that will substantially reduce its effectiveness and lead to vast amounts of pork barrel spending.
The Climate Leadership Council would have been much wiser to concentrate on initiatives to hedge against the possibility of any future climate warming as I have suggested in an earlier blog. For example, increasing the role of nuclear power by trimming the draconian Federal standards for new power plants; or by abolishing government-insured mortgages for seaside housing; and by modifying shoreline infrastructure threatened by rising tides, such as adjacent highways, rail lines, and airport runways.
The history of trying to impose "top down" solutions to difficult economic and political problems is not a happy one, as the history of federal health care legislation shows. We should temper the enthusiasm for a theoretically attractive carbon tax with that fact in mind.