A Carbon Tax Would Harm U.S. Competitiveness and Low-Income Americans Without Helping the Environment

In America’s struggling economy, fossil fuel production stands out as a bright spot. Currently, 9,000,000 Americans work in the oil and natural gas industry, [1, see note regarding references at the end of the article] and another 550,000 Americans work in coal mining. [2] Wages for these jobs are well above average, [3] and production of fossil fuels, particularly natural gas, is booming in places like North Dakota. [4]

The economic gains being made now have the potential to be long-lasting; the United States has the largest reserves of fossil fuels—oil, coal, and natural gas—in the world (Figure 1). These gains, however, are threatened by unfriendly energy policy from Washington. President Barack Obama and his allies in Congress continue to block fuel production on federal lands and offshore, [5] have stopped a pipeline project that would increase North American–sourced petroleum products, [6] are severely limiting coal production, [7] and continue to allow the Environmental Protection Agency to regulate carbon dioxide (CO2).

1. The U.S. has the world’s largest fossil fuel reserves. The top five nations, in billions of barrels equivalent, are illustrated. Source: Congressional Research Service

The left has argued for decades that using fossil fuels is bad for the country. [8] Initially, their concerns involved direct public health concerns such as oil spills, mercury, and other toxic pollutants.[9] Their attack on fossil fuels has increased in recent years because fossil fuels are by far the biggest contributor to U.S. greenhouse gas emissions (GHGs), thought by some to lead to global warming. [10] To limit GHG emissions, President Obama pushed a cap-and-trade energy bill in the 111th Congress that passed the House but was halted in the Senate. The President is now moving full speed ahead with regulation of GHGs by the Environmental Protection Agency (EPA) under the Clean Air Act.

Although cap-and-trade was rejected by the Senate and the American people as a new energy tax, some have championed the idea of a new carbon tax, with arguments aimed at conservatives (it can be revenue neutral) and liberals (it can help the environment) alike. [11] A new federal carbon tax would likely fail to achieve either goal while further slowing America’s recovery.

Carbon Tax and Cap-and-Trade: What’s the Difference?

Cap-and-trade and a carbon tax are two ways to limit greenhouse gas emissions. If planners knew the market’s behavior perfectly, then a cap-and-trade system and carbon tax could put the same price on emissions, achieving exactly the same effect—reduced emissions and higher prices for fossil fuel–powered energy and products. Planners cannot know such information, so the proposals look to achieve different goals: A cap-and-trade system includes a strict limit on the amount of GHGs emitted but unclear costs, while a carbon tax imposes higher known costs but unclear emissions reductions.

Under a cap-and-trade system, those who wish to emit must purchase an allowance by auction or from others who have allowances to sell. In the Waxman–Markey bill, [12] for example, allowances would be distributed to utilities (to soften the increase in rates), manufacturers (to protect domestic industry), and others, including environmental groups that theoretically would use the proceeds to improve the environment. Other allowances were to be auctioned to the highest bidder, thus revealing, in theory, how much the “right to emit” costs.

A carbon tax approaches the issues from a different perspective. In that system, the “right to emit” is not limited by capping the amount of GHGs that are emitted. Instead, anyone who wishes to emit must pay a tax. Since it will be more expensive to emit than before, GHGs will decline, albeit by an unknown amount: The higher the tax, the more the emissions will decline. Many environmentalists prefer the cap-and-trade system because the cap ensures that the environmental purposes of the act are met.

Each of these mechanisms is effectively a tax, or fee, on emitting GHGs. To create momentum for its passage, proponents of cap-and-trade argued to conservatives that it would do less damage to the economy than EPA regulation would. Now others are saying that a carbon tax could be better still. But as one scholar at the American Enterprise Institute put it, “Carbon taxes might be ‘better’ than cap-and-trade or regulations, but then, in a train-wreck, losing a hand is better than losing a forearm, which is better than losing an entire arm. Most would rather skip the wreck.” [13] Congress seems closer to stopping EPA regulation [14] than it does to adopting a carbon tax, especially considering that conservatives successfully attacked cap-and-trade by calling it an energy tax.

Enacting a carbon tax is an unwise policy and against conservative principles because, among other reasons, a carbon tax would:

  • Do next to nothing for GHG emissions and the environment,
  • Harm American manufacturing competitiveness,
  • Create a new revenue stream based on behavior modification, and
  • Hit low-income Americans especially hard. [15]

No Environmental Benefit

Even if one assumes that rising levels of carbon dioxide in the atmosphere lead to higher global temperatures, a carbon tax in the United States that reduces emissions domestically would have zero direct effect on foreign emissions if we acted alone. In fact, unilateral action by the U.S. would have very little effect on total global emissions.

The EPA analyzed a cap-and-trade proposal and projected global CO2 concentrations in a baseline and under legislation, demonstrating the effects graphically.[16] (See Figure 2.) The Administrator of the EPA testified on July 7, 2009: “I believe the central parts of the [EPA] chart are that U.S. action alone will not impact world CO2 levels….”[17] The analysis showed that even if the U.S. adopted stringent carbon caps under that legislation [18] and the international community did not, global CO2 concentrations would decrease 25 parts per million (with concentrations equaling 694 ppm in 2095). International action, by contrast, would decrease concentrations by 202 ppm.

2. Global CO2 concentrations (MiniCAM) results. Source: EPA

Just as in a unilateral U.S. cap-and-trade system, a unilateral U.S. carbon tax would likely further increase foreign emissions because of a phenomenon called “carbon leakage.” As energy-intensive industry relocates from the United States to other nations such as Mexico, Vietnam, or China (already the world’s largest emitter of greenhouse gases), GHG emissions and toxic pollutants could increase more than they would if those industries remained in the United States. [19]

China’s Role and Benefits of Growth

China’s role in emitting GHGs can hardly be overstated. From 2000–2008, its emissions doubled from 3.4 gross tons (Gt) to 7 Gt of CO2. By contrast U.S. CO2 emissions remained about 5.7 Gt in 2000 and 2008. [20] China overwhelmingly relies on coal for electricity generation—accounting for about half of the world’s annual coal consumption. [21]

For those who lament an increase in global GHG emissions, China’s carbon-footprint increase in the past few decades has been a disaster, but the Chinese people have seen a nearly sixfold increase in per capita gross domestic product (GDP) from 1990 to 2011. [22] Hundreds of millions of Chinese have been lifted from poverty thanks to agricultural and free-market reforms that have led to economic development. [23]

It is important to remember that environmental policy must ultimately be good for people, any country’s most important resource. Moreover, economic growth also creates the wealth necessary for countries to make real environmental improvements in the long run. [24]

Unilateral action by the United States to tax carbon emissions is unwise because it would not achieve its stated environmental goal: material reduction of global GHG emissions.

Harm to Manufacturing

While some may believe that the United States is a post-industrial power, it is still the world’s top manufacturer [25] (although China is gaining), with manufacturing accounting for 12.2 percent of U.S. GDP. [26]

Proponents of cap-and-trade acknowledged that a price on GHG emissions would negatively affect domestic manufacturing unless the cost was fully and permanently offset. Additionally, to offset the impact on manufacturing fully and permanently would be to negate the desired environmental impact of the policy (make it more expensive to emit GHGs and therefore reduce GHGs).

To make up for the impact on manufacturers, the Waxman-Markey cap-and-trade bill gave temporary free allowances to manufacturers to ease the impact of the cap on emissions. Nearly all manufacturers use energy, and for those that emit greenhouse gases in significant quantities, such as steelmakers, a tax on a major input would be devastating. Moreover, a tax on carbon would also affect those who use carbon-intensive fuels for feedstocks, as is the case in the chemical and fertilizer industry. The recent natural gas boom is encouraging more investment in these industries, [27] but a carbon tax would make such investments much less appealing.

During the cap-and-trade debate in 2009, the National Association of Manufacturers and the National Black Chamber of Commerce commissioned studies looking at the effect of carbon caps on manufacturing and found that hundreds of thousands of manufacturing jobs would be lost. [28] A Heritage Foundation study reached the same conclusion. [29] A carbon tax would raise prices on energy inputs for manufacturing and therefore destroy manufacturing jobs.

A carbon tax would especially hurt states with higher concentrations of manufacturing and that use coal for electricity generation. The Heritage Foundation developed the Manufacturing Vulnerability Index, a list of states with their combined manufacturing prevalence and coal electricity generation, highly concentrated in the Midwest. [30] These states have substantial infrastructure for manufacturing and coal-powered electricity generation that would be hit especially hard. A transition to other power-generation sources and economic activities would be very costly to these already hurting states.

While proponents of a carbon tax explain that they could impose an adjustment tax on goods from countries without a carbon tax to help level the playing field, such an action could precipitate a trade war. Moreover, it would place U.S. manufacturers that export from the United States to other markets at a disadvantage when compared to manufacturers that produce in nations without GHG controls.

A new carbon tax should not be imposed because it would harm U.S. manufacturing, destroying the livelihood of too many Americans who want to go to work producing products for the world.

New Opaque Tax Easy to Raise and Seeks to Manipulate Behavior

Creating an entirely new federal revenue stream does not usually end up well for taxpayers, even if its initial goals are modest. Data from the Tax Foundation show that the marginal income tax rate, for example, was 1 percent for married filers making less than $448,759 per year in 1914 (adjusted for inflation). [31] The highest marginal rate at the time was 7 percent. [32] Over the years, the highest marginal rate was raised to nearly 70 percent as recently as 1979 and 91 percent in 1963. [33] Currently, the highest bracket is 35 percent, and the lowest bracket is 10 percent. [34] Reducing marginal income tax rates is a great way to encourage growth and prosperity, as Presidents as diverse as Ronald Reagan and John Kennedy have recognized.

Some economists eager to reduce taxes and encourage economic growth have thought that revenue from a new carbon tax could be used to reduce other harmful taxes on capital and investment. But because the carbon tax hits the poor disproportionally, it is likely that revenue from the tax will be used to alleviate its impact on the poor or for some other purpose rather than to cut other taxes in an economically [stimulative] way.

The Heritage Foundation has published the principles for tax reform and has noted that, above all, “[t]axes should raise the revenue to fund necessary government operations in ways that cause the least possible economic damage” [35] and that government should avoid “picking winners and losers with preferential or punitive policies.” [36]

While some have asserted that they can be “agnostic” about whether human activity is contributing significantly to global warming and still want to tax carbon, choosing to place a tax on carbon is an endorsement of the theory that man-made emissions of GHGs have a significantly harmful effect on the environment. In effect, such backers of the carbon tax would treat using fossil fuel resources to heat or cool your home, turn on your lights, drive your car, and charge your cellular phone the same as they would treat using disfavored goods such as alcohol and cigarettes.

Using the tax code to discourage behavior has been encouraged by NFIB v. Sebelius, the health care case in which the Supreme Court held that the federal government has broad authority to tax, including to compel behavior. [37] Some localities have already imposed taxes on plastic bags and soft drinks. [38] Conservatives would be on a more solid foundation advocating for a simplified tax code whose purpose is to raise revenue, not to influence behavior. [39]

At least among otherwise conservative economists, the argument is that the carbon tax should capture the costs of externalities. Considering that the field of climate science is far from settled, the external costs of GHGs, if any, are very unclear, and the tax rate may need to change. Such uncertainty will undoubtedly hamper investment in carbon resources even more, with considerable uncertainty and the prospect that policymakers will make “polluters” (what liberals call those who develop and use fossil fuel resources) pay and reduce other taxes or spend increased revenues. [40] Such uncertainty and the likelihood of future gaming of the system would make it difficult to exploit our world-leading fossil fuel resources.

Another problem with a carbon tax is that it very well could be hidden. When he was an academic, Gilbert Metcalf, an economist who has served as Deputy Assistant Secretary for Environment and Energy in the Office of International Affairs at the U.S. Department of the Treasury, [41] co-authored a blueprint for taxing GHG emissions that was published in the Harvard Environmental Law Review. The paper states that: With respect to the tax base, we show that collecting the tax upstream would make it possible to accurately and cheaply cover 80% of U.S. emissions by collecting the tax at fewer than 3000 points, and that it would be possible to cover close to 90% of U.S. emissions at a modest additional cost. [42]

Clearly, such a tax is not meant to be collected at gas pumps or from utility customers, which would dramatically increase administrative costs. While a carbon tax could be more or less apparent to American citizens, depending on its design, the advocates of such a tax have no incentive to keep the tax small. In the words of Professor Thomas Sowell, “In general, the less visible a tax is, the more revenue can be collected without resistance or electoral retribution by the voters.” [43] Accordingly, a major concern would be the visibility of such a tax.

A new carbon tax would simply give Washington another tool with which to stealthily raise revenues and manipulate American families’ behavior, and any such tax should be rejected.

Poor Americans Hit Hardest

The poor tend to spend a higher proportion of their earnings on energy, particularly utilities and transportation. Moreover, some Americans use more fossil-fuel energy than others because of driving distances (rural families drive more—27,700 miles per household vs. 17,600 miles for urban households [44]); geography (less temperate weather means more heating and cooling costs); and already constructed energy infrastructure (coal plants are prevalent in the Midwest near mining operations). A carbon tax would disproportionately hit these families, whose behavior is difficult to change in the short run.

While economists like to imagine that the carbon tax would be offset by reductions in taxes on capital or some other particularly economically damaging tax, the fact is that, politically, it is far more likely that funding from the carbon tax would be used to reduce the tax’s impact on the poor. Senator Barbara Boxer (D–CA), who chairs the Senate Committee on Environment and Public Works, rejected the idea of using new revenue from the carbon tax to reduce corporate taxes—a favorite idea among some on the center-right—and said that any revenues should be used “to make sure…the middle class gets the breaks in the interim while we move to clean energy.” [45]

Nearly all of the cap-and-trade proposals introduced during the 111th Congress included measures to blunt the impact on less affluent families, but while such proposals would soften the blow for low-income households, an energy tax would harm families again and again, both directly through energy prices and indirectly through higher prices for goods and services. [46] As Congressional Budget Office Director Douglas Elmendorf has said: [A]t any point in which we are putting a price on carbon emissions, that would be passed through to the cost that consumers face on energy products but also all other products that are made using fossil fuels…. I don’t know if there are any goods that use no energy in their production. It seems to me unlikely. [47]

Dampening the impact on poor families was deemed a politically necessary design element for cap-and-trade and would likely be required in any carbon tax. Looking at compliance costs for cap-and-trade (with an allowance price around $20 per ton), the Congressional Budget Office found that the lowest quintile lost more than three times as much income (measured as a percentage) as the top quintile (2.5 percent as opposed to 0.7 percent). [48] Because the poor spend a higher portion of their income on energy and the higher energy prices are passed on to the consumer, [49] this result is not surprising.

In fact, increasing consumer costs is a primary reason for pricing carbon, according to many of its proponents. As Treasury Secretary Timothy Geithner has explained, it is necessary for the price of energy to increase if “you’re going to change how people use energy.” [50] And who will change their behavior? It is far more likely that the poor and middle class—those who have to live from paycheck to paycheck and spend a bigger portion of their earnings on energy—will be forced to alter their lifestyles much more (drive less, heat and cool the home less, buy fewer goods and services) than the wealthy.

In addition to a clamor that carbon tax revenue be used to counteract the tax’s regressive nature, environmental groups and the alternative energy lobby will likely advocate that the revenue be spent to promote new, unproven “green” technology. So-called green energy companies that have started in response to a massive government infusion of capital into such enterprises ($44.3 billion in 2009 alone) [51] are failing, and some are calling for an increase in funding, which has been reduced to “only” $16.1 billion in 2012. [52] The carbon tax presents a tempting revenue stream for those companies and groups: A small portion of the funds might be directed to providing transition relief for displaced workers (such as miners), supporting basic energy research and development, solving vexing issues associated with bringing CCS to scale, constructing any necessary transmission lines, and perhaps encouraging conservation activities that market imperfections might otherwise block. [53]

Left unsaid is the overhead cost to administer the tax—these interests receive their money only after it has been cycled through Washington, D.C. A new carbon tax would seek to manipulate our behavior and would harm poor and middle-class Americans. For these reasons, it should be rejected.


Even if one concludes that carbon dioxide and other greenhouse gases are leading to increased temperatures—and there is robust debate and far from a public consensus on the magnitude of man-made warming, particularly among conservatives—a carbon tax would be counterproductive because it would do next to nothing to lower global temperature, while it would harm American manufacturing competitiveness, create a new revenue stream based on behavior modification, and harm low-income Americans.

Free-market conservatives in particular should denounce a new carbon tax as more meddling by the federal government. Specifically, they should urge Congress and the President to:

  • Categorically reject a new carbon tax, which would have little environmental impact, harm manufacturing, be another tax seeking to control behavior, and disproportionately harm the poor;
  • Work to stop EPA regulations of greenhouse gases, which will wreak havoc on the economy and have no appreciable impact on the stated environmental goal of reducing global GHGs; and
  • Work toward tax reform that results in a system that will raise the revenue to fund necessary government operations in ways that cause the least possible economic damage and not pick winners and losers with preferential or punitive policies.

A carbon tax is in essence a perpetuation of a disastrous policy of picking winners and losers from Washington instead of allowing families to choose which energy sources work best for them. From ethanol subsidies to grants awarded to now-defunct solar manufacturers like Solyndra, these policies have increased costs to American families and wasted taxpayer dollars.

Energy, like other sectors, should not become a playground for connected lobbyists to collude with government for special treatment. The bottom line in energy is that supplies can be delivered and new supplies created through the private sector rather than through mandates, regulations, taxes, and subsidies ordered by government.

Derrick Morgan is vice president for Domestic and Economic Policy at The Heritage Foundation. This opinion was originally published on and is reprinted by permission. Links to the numerous references are available on the Heritage Foundation website.

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