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January 16, 2013

Grimm's Carbon Tax

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Maybe the wolf should have skipped the granny disguise and just scarfed down Little Red Riding Hood in the woods. It couldn’t have worked out any worse for him. That appears to be the logic of carbon-tax cabal in Washington. The latest triad of bills — Lieberman-Warner, Waxman-Markey and Kerry-Boxer — all died once their “cap-and-trade” costumes were pulled off to reveal a carbon tax. So, why not just try hitting consumers with a straight-up tax?

Or maybe it’s just the political version of “This is so crazy it might work.”

Whatever their logic may be, Washington's Big Green Lobby is trying once again to drum up interest in a carbon tax. But their “new” proposal would have the same effects as their old cap-and-trade gambit: Americans still would find themselves facing fewer jobs, lower incomes and higher utility prices.

Using data from the Energy Information Administration’s Annual Energy Outlook for 2012, Nicolas Loris and I recently updated our economic impact analysis of a carbon tax.

We used the EIA’s scenario for a $25-per-ton tax that increases 5 percent per year through 2035, which is similar to the carbon taxes being discussed in Washington. We found this tax would:

• Cut the income of a typical family of four by $1,900 per year in 2016 and lead to average losses of $1,400 per year through 2035.

• Raise the family-of-four energy bill by more than $500 per year (not counting the cost of gasoline).

• Cause gasoline prices to increase by up to 50 cents per gallon.

• Lead to an aggregate loss of more than 1 million jobs by 2016.

Why would anyone vote for that? Well, Hansel walked into that witch’s house because the gingerbread looked so nice and he was promised a hot dinner and a soft bed.

Same deal with the magic carbon tax. Its proponents claim it would be revenue-neutral. The carbon tax, they say, would allow Washington to eliminate some other, more heinous tax (to be named later, apparently). Moreover, they say, raising the price of carbon would make carbon regulations unnecessary. In reality, of course, no other tax would disappear and the regulators will keep trying to get their hands ever more tightly wrapped around carbon.

First, there are too many plans for the trillions of dollars in revenue that a carbon tax would generate, such as wealth transfers and financing U.N. climate funds. At a recent American Enterprise Institute conference touting revenue neutrality, the panelists were discussing new-and-improved uses for carbon tax revenue even before they left the stage. A Massachusetts Institute of Technology study of a revenue-neutral carbon tax discussed what to do with the excess revenue. If it were truly neutral, there would not be any “excess” revenue — all of it would be used to offset the other tax.

The sad fact is that, with so many special-interest lobbyists swarming Washington, it would be impossible for a carbon tax generating hundreds of billions of “new” dollars per year to go from one congressional committee to another without getting mugged.

Second, the thought that a carbon tax would cause the Department of Energy and the Environmental Protection Agency to get rid of their carbon regulations is equally far-fetched. If you don’t believe a conservative columnist, would you believe a liberal legislator? Rep. Henry A. Waxman of Waxman-Markey fame, a California Democrat, said this about swapping a carbon tax for regulations: “But because it’s so complicated, I would not support pre-empting EPA.” Nor would many other carbon regulators.

So, the carbon tax would cut a family of four’s income by $1,400 per year, raise their utility bills by $500 per year and increase the chance that they find themselves out of work altogether. Unfortunately, in the carbon tax fairy tale being spun in Washington, there is no woodman’s ax or clever sister to save the day.

-David Kreutzer is research fellow in energy economics and climate change in the Heritage Foundation’s Center for Data Analysis.

First appeared in The Washington Times.

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