Climate Misconception #17: Carbon taxes are a great way to raise money for green projects

There’s gold in them thar climate laws.  If taxes are imposed on the production of fossil fuels or if carbon permits are sold at market prices to fossil fuel companies, vast sums of money will be raised.  The US, for instance, is currently responsible for somewhat over five billion tons of CO2 equivalent emissions per year.  (There are problems with the way these numbers are calculated, but the order of magnitude is OK.)  If we were to put a $50 per ton tax on them, and putting aside the demand reduction this would lead to, that comes to $250 billion: serious money.

Environmental groups have been scraping for a billion here, a billion there to fund critical programs for decades.  We need a smart grid, mass transit, subsidies for home insulation, money for R&D in energy efficiency and renewables, and much more.  Environmental investments were underfunded during the good years, and now they are falling even further behind under conditions of austerity.  Not surprisingly, when environmentalists see the possibility of a quarter trillion dollars in new revenue, they pull out their want list.

Unfortunately, while I completely agree that these investments are necessary—even more necessary than before if we get serious about carbon—carbon taxes or permit revenues are not a good source.  The main problem is that they are essentially sales taxes.  No matter where they are levied, they will be passed along to the ultimate consumer.  And this is a feature, not a bug: the goal is to change the habits of hundreds of millions of people, substantially and quickly.  In the end there are only two ways to do this, with lots of very detailed regulation or by raising the cost of carbon-intensive goods and services.  The second is preferable.  But sales taxes are regressive, since the lower your income the more of it you spend.  They provide a poor revenue stream for public investment, and green groups should not try to capture them.  As I will argue later, it is better public policy—more progressive and more politically tractable—to rebate carbon revenues on a per capita basis.

One irony in this debate is that there is no shortage of money that could be used for environmental investments.  A large part of the US budget, for instance, could readily be repurposed; this includes massive subsidies to fossil fuels and most of the farm subsidies, not to mention military expenditures of minimal (or even negative) utility.  Moreover, in a macroeconomic environment characterized by a large output gap and rock-bottom interest rates, borrowing to pay for some of these investments is not only possible but economically desirable.  These are fights that should not be abandoned.

It makes a difference not only what investments get made but also how they are financed.  This is partly a matter of social justice, but it is also important politically.  The coalition needed to advance serious climate policy in the teeth of business resistance needs to be wide and deep; in particular it has to include the majority of citizens who have low or moderate incomes.  Proposing regressive taxation to finance green investment objectives is a political divider, not a uniter.

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