Two Republicans–Bob Inglis Jeff Flake–and one Democrat, Dan Lipinksi, have just introduced legislation that would seek to reduce global warming by imposing a carbon tax, all of the revenue from which would be used to reduce the payroll tax. It appears that the level at which the tax would be imposed would produce the same amount of reduction in carbon as current proposals for cap and trade. While I have serious questions as to why Republicans like Inglis and Flake are proposing this plan now (obviously one has to suspect it’s just because cap and trade seems to finally be getting legislative traction), I have to say that in my judgment their approach makes much more sense than cap and trade.
There are substantive reasons why I think a carbon tax (CT) is better than cap and trade (C&T), the main reason being that global warming is a long-term problem, and thus even large fluctuations in the emission of carbon don’t really matter so long as they even out over time. You can solve this problem with C&T (by allowing “banking”) but only at the price of additional complexity, which introduces greater opportunities for gaming. In addition a CT is more transparent than a C&T, which I also think makes gaming more difficult.
The main reason I prefer a CT, however, is that I deeply believe that the political transaction costs (PTC–the costs that are paid in order to buy off sufficient opposition) of C&T are higher than a CT. Here’s the argument for why something like what Inglis, Flake and Lipinksi proposing might have lower PTC than C&T (over and above the transparency issues). The narrower the potential supporters of a proposal are, the higher the PTC, since you end up having to pay more to put together a majority. If you’re starting with a larger potential base of support, the leverage of marginal supporters is lower. So, I’d be interested in what would happen if the Dems were to call the bluff of the Republicans who support this. Say: we kind of think C&T has some advantages, but we’d rather do this in a bipartisan way, and a carbon tax has roughly similar potential to control carbon emissions (I honestly believe that CT will actually work much better, but that’s water under the bridge and I don’t want to revisit the issue). If you (Republicans) will agree to impose the CT at a level sufficient to get as much GHG reductions as the C&T we’re talking about, we’ll take it and call it a day.
The Republican plan also uses all the CT revenue to offset the payroll tax. I think this has some real power, because workers would see the benefit directly in their paychecks. But it’s arguably not as good as a straight per-capita payment right before Christmas (which would also go to non-workers). But that said, it’s a lot better than what some Republicans have talked about before, which was using it to cut the corporate tax. You could also divide the proceeds of the CT and put some percentage of them in a trust fund to pay for green infrastructure, like trains, light rail, buses, etc. This is especially important because given our current transportation system, it will be hard to get people to reduce their carbon footprint. In addition, putting some of the money into a green infrastructure trust fund would give some concentrated interests (states, cities, infrastructure firms) a strong interest to maintain the level of the carbon tax once it starts to bite (which combined with the diffuse public interest in maintaining the reduced payroll tax would give it a fighting chance at political sustainability).
I know that this might just be a political gambit–but it may be one that Dems can take advantage of. I think we’ve already seen massive rent seeking in the C&T proposals currently under discussion, as I think was easily predicted. I think it’s worth seeing if a CT could be negotiated with lower PTCs. There may be a possibility to box the Republicans in now, since they’ve actually put a proposal with their names on it on the table.