Cut Taxes, Cut Carbon

By Peter Bryn

Want to cut taxes and shrink the government? Let’s talk climate change.

We often hear of climate change as a left-only issue. And it’s fair to see why: most solutions we’ve seen have been big-government, top-down policies crafted or inspired by the UN. To add insult to injury, the anti-fossil-fuel language that sometimes follows makes climate action a particularly tough sell here in Texas.

But not having a cure for cancer shouldn’t cause us to ignore it. Instead, researchers in the Texas Medical Center are at work seeking better remedies. Similarly, it’s time for the best minds on the Texas political right to acknowledge this growing malignant tumor and put forward a better solution.

In the driver’s seat of this eco-right call to action nationally are two Reagan guys: Art Laffer (Economic Adviser) and George Shultz (Secretary of State). They would argue that if I operate a restaurant, I can’t socialize my costs by throwing my trash on the street – I have to pay to have it picked up.

Greenhouse gas emissions are no different. My personal choice to emit them is subsidized by others through their higher grocery bills (floods), FEMA costs (hurricanes), and insurance premiums (wildfires). Said differently: we’re already paying a carbon fee, but through a murky and inefficient marketplace rather than with transparency in the purchase price.

So, let’s listen to Milton Friedman and “internalize the externality.” That is, if we put the true costs of the product back into the purchase price, the consumer will have complete visibility and the market can operate properly, and efficiently, again.

In this context that means charge those who emit carbon dioxide from fossil fuel consumption (that’s all of us, by the way) a fee for the privilege to do so. That creates a clear, predictable price signal on carbon dioxide that will unleash our existing energy companies as well as American entrepreneurs and investors in a low-carbon economy.

But wait a second – if we put a fee on carbon emissions, where will that money go? Mr. Friedman certainly wouldn’t let the government keep it. That’s where revenue-neutrality comes in: all revenue raised from a carbon fee must be rebated back to the economy, netting zero government growth.

There is legitimate skepticism about the efficacy of revenue-neutral programs, and for good reason. But, there are different ways to achieve revenue-neutrality. Libertarian groups like R-Street and economists like Resources for the Future have studied the benefits of doing a tax swap, i.e. lower corporate and income taxes first, then levy a carbon tax. This approach could be net-stimulative to the economy while lowering income taxes – and who wouldn’t like that?

Other groups like Citizens’ Climate Lobby have studied sending the money back to households on a per-capita basis as a monthly “dividend check,” similar to the Alaska Permanent Fund. While perhaps slightly less stimulative, the dividend checks are more auditable and tend to shield low/middle-income households from rising living costs. Plus, revenue-neutrality is assured since there’s not a politician in the country that would chance the political backlash of touching people’s rebate checks!

If this revenue-neutral carbon fee approach sounds familiar, it should: ExxonMobil has been advocating for this since 2009. And as an engineer that proudly spent eight years there, I was elated to see they recently called a meeting with the Houston Chronicle’s Editorial Board to directly explain why they support it. Not to be outdone, the Chronicle itself published two subsequent articles supporting a carbon fee over the following week.

Speaking of Exxon, what does a carbon price mean for Texas petroleum? Probably not as much as first meets the eye.

Coal, oil, and gas are used differently. Coal is too dirty to use for much else than powering the grid. Gas use is split between power generation and heat. And, of course, oil is primarily used for mobile transportation and as a material feedstock.

A rising carbon price will likely drive up gas demand, largely at the expense of coal. And as the carbon price ramps up, it shouldn’t take too long before carbon capture and sequestration becomes cost-effective, keeping gas in the game indefinitely.

As for oil, first we’ll see consumer behavior change, then energy efficiency improve, but we’re decades away from batteries or hydrogen truly taking over this space.

So, fear not fellow oil and gas producers: nobody’s job is going away over a carbon fee. In fact, those of you in enhanced oil recovery might expect a call from your power industry friends asking about carbon capture and sequestration.

ExxonMobil’s ready – shouldn’t we be too?


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