To tax or not to tax carbon?

As with so many gimmicky fads intended to reduce global warming, environmentalists now exuberantly call out: “tax carbon!”

Taxation and tax avoidance are art forms wielded by skilled, precise practitioners, not the blunt tool of well-intentioned hopeful thinkers relying upon complex markets.

On balance, the current rough concept of taxing “carbon” is utterly flawed in so many ways it deserves some pointed attention. Space prevents a detailed exposition of the wide range of traps and perverse outcomes such a concept holds.

The stated overarching objective is to reduce global warming by placing a vaguely outlined tax on carbon. The expectation is that by increasing prices, a commensurate reduction will occur in consumption of carbon-based materials as combustible fuel for transportation and electricity, along with emissions of its combustion byproduct, carbon dioxide, a greenhouse gas.

While the tax code has been a refuge for scams, millionaires and mischief, it is also a way to create focus. A tax on carbon, one which is not focused on building physical assets and solutions to substitute for current carbon-based energy systems, is merely a waste of time and a way to divert wealth away from and delay the physical transformation which ultimately must occur.

To be clear, the revenue generated by a carbon tax is not destined to be directly used to build and deploy new equipment for electrification of transportation or decarbonizing electricity production, including new transmission and storage capabilities. That is left to the vagaries of “markets.”

A “tax on carbon” is most often described as attaching at the point “carbon” first enters the commercial process that eventually produces products for consumers and industrial use: at the mine or well head. This simplified accounting approach translates into increased prices at each stage of commerce, including a proportional increase in profit.

Follow the money! As a tax, it flows to the government. It will almost certainly end up diverted into special interest programs from poverty to debt reduction to military expenditures, police salaries, government buildings, schools, tax cuts for the wealthiest -- a la Grover Norquist, and into the great abyss of uses beyond normal humanity to anticipate.

Keep it coming! Worse, when governments derive spendable funds from taxing carbon, they become strongly invested in maintaining carbon’s continued use. In this way, even with some marginal reduction in use due to increased prices, the government and government employees indirectly become handmaidens for those who seek to extend the carbon-based status quo.

Some boldly suggest an impossible hypothetical in which tax revenues are collected by governments but magically bypass government coffers to be fully rebated directly back to consumers. This imagined approach has the bizarre consequence of both raising prices and simultaneously increasing consumer spending power to pay those increased prices. Again, this “circle of life” does nothing to efficiently produce and deploy the substitute energy, transmission or transportation technologies we urgently need.

Taxing carbon increases consumer prices at the point of purchase and thus is regressive, most adversely affecting the poorest people.

Even assuming a tax on carbon will theoretically raise the price for all things and thus reduce some consumption, it will fail to solve our overarching problem because it diverts funds away from the needed solutions, thus diminishing the funds available for building the necessary modern, large-scale wind, geothermal and solar PV facilities needed to truly reduce greenhouse gas emissions.

Instead, the “market” is visualized as making up the difference to supply those facilities. Ordinary markets, however, provide what consumers can afford, and this tends to efficiently cut out the poor, especially as they struggle to pay for the status quo. Utilities and subsidies have traditionally bridged this gap.

More importantly, existing coal, natural gas, and oil interests can rapidly arbitrage or reduce their prices in order to off-set any increased price signal large enough to push a change in technology. When the price signal is relatively small, they can merely pass on the cost of any carbon tax in their prices, well aware that their current technology is already built and constitutes a sunk cost to be profitably expensed over the longest period possible. Increased fuel costs are a small part of the overall picture, and thus any realistic tax will have a relatively small effect, one absorbed entirely by consumers.

By example, current gasoline taxes are used to build roads. People continue to buy gasoline, even at increased retail prices, as they have no viable substitutes. Gas taxes are not ordinarily used for mass transit. This is precisely what will occur with a tax on carbon unless we focus on deploying real substitutes.

Only if carbon-tax revenues are narrowly and exclusively focused on actually decarbonizing electricity production by building and massively deploying large-scale wind, geothermal and solar PV facilities and electrifying transportation to the maximum extent possible, can the environmental objectives of a carbon tax succeed.

Coffey is an attorney based in San Diego. He can be reached at Comments may be published as Letters to the Editor.

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