by William O'Keefe
November 19, 2012
If the Obama Administration and Democrat leaders in Congress pursue a carbon tax as part of their deficit and climate policies, they will test the old axiom that if you don’t learn from history, you are condemned to relive it.
In 1993, President Clinton proposed a BTU tax on energy in his first budget. The political backlash was breathtaking and broad. Since energy is embedded in every part of the economy, the BTU tax would have raised the cost of almost all goods and services. Economic consulting firms concluded the tax would do “serious damage to a fragile economic recovery.” At the time, it was estimated that the tax would raise $30 billion and cost each family $500. Today, the costs would be about $50 billion and $800. Job losses were estimated at 700,000 over three years.
The BTU proposal became a catalyst for a broad based coalition representing large and small businesses, transportation, manufacturing, agriculture, building trades, and even social service organizations that need gasoline and heating oil to care for the poor and homeless. The work of the coalition captured a lot of attention from the media. Its grassroots activities made clear to members of Congress that they should support the tax at their own peril. Since, as Samuel Johnson once observed, there is nothing like a hanging to concentrate the mind, Democrat support for the tax vanished. With outright defeat clear, the Administration sued for peace and the BTU became a relic of flawed policy.
BTU became a verb and members of Congress wanted to avoid being BTU-ed, but in 1994 voters enacted retribution and turned Congress over to republicans.
The economy is in worse shape today than it was in 1993, and it could easily slip back into recession. Carbon tax proponents argue that it would be revenue neutral with reductions in other taxes. But that requires suspending disbelief and a triumph of hope over experience.
In theory, the carbon tax proposal is elegant. Tax something considered bad and lower taxes on something considered good, for example labor. There are two problems that are not easily solved.
First, since the Energy Information Administration (EIA) projects fossil energy to remain our primary energy source for decades and energy is deeply embedded in the economy, a carbon tax would raise the cost of all goods and services. The Congressional Budget Office (CBO) recently concluded that it would have a disproportionate impact on lower income families. That would lead to efforts to mitigate this regressive impact. But that fix would not be straight-forward and soon there would be far more complexity than anyone predicted. And complexity breeds unintended consequences.
Second, it is no secret that Congress is addicted to spending. A small carbon tax at the outset would be easy to increase in small increments. Then in time a small tax will become a big tax. Anyone who doubts this should study the VAT experience in Europe. Rates go up; never down. Even today as they face economic catastrophe, Spain and Greece are considering raising their VAT above 20 percent.
Using climate change as a justification demonstrates why this proposal is a sham. Our carbon dioxide emissions are declining and according to the EIA will not return to 2005 levels until 2035. Part of that decline is due to a poor economy but a major part is due to the shift from coal to natural gas, which is still in its early stages of transition. A far wiser policy would be to remove barriers to that transition so it can take place faster.
Carbon emissions are rising in China and other emerging economies. Helping them develop the capacity to use our energy technologies and make greater use of natural gas would slow their emission growth, help them raise their standards of living, and increase our exports which would increase jobs.
We can do better than create the son of a BTU!