A Tax by Any Other Name

COMMENTARY Environment

A Tax by Any Other Name

Apr 6th, 2009 3 min read
Nicolas Loris

Fellow in Energy and Environmental Policy

Nick is an economist who focuses on energy, environmental, and regulatory issues as the Herbert and Joyce Morgan fellow.

Many Americans find the debate in Washington over adopting a "cap and trade" program to reduce carbon dioxide a bit confusing. That's understandable. Put simply, it's a tax on energy consumption.

In fact, it would be a huge tax. If enacted, cap-and-trade will be one of the government's largest revenue sources within the next decade. It also would break one of President Obama's promises. In his speech before Congress in February, he said, "If your family earns less than $250,000 a year, you will not see your taxes increased a single dime." Unless you use energy, apparently.

Yet you won't hear the proponents of cap-and-trade calling it a tax. The Obama administration and many members of Congress claim that any money generated by a cap-and-trade is "climate revenue." As if every time the temperature rose, the government would magically receive more money. Not quite.

It's a tax on your energy bill, plain and simple. The administration's federal budget blueprint, however, maintains that everything will be all right. Why?

Because the money will be recycled back to the people. Under the EPA's section of the budget, about $80 billion per year in energy tax revenues will be dispersed as a tax cut to low- and middle-income workers and used for renewable technology investment, beginning in 2012, if cap-and-trade becomes law. But the Congressional Budget Office estimates that the tax revenues from cap and trade could be much higher -- as much as $300 billion per year by 2020.

Deep in the details of the budget, the Obama administration acknowledges this, when they suggest additional revenue would be redistributed to the public and when they say these "climate revenues" would be used for tax cuts.

Still, the numbers don't add up. The administration sets aside $400 per individual and $800 per couple, but that diminishes for individuals making $75,000 or more for couples making above $150,000. It phases out completely for individuals whose income is above $100,000 and couples above $200,000 - clearly less than the $250,000 mark in Obama's pledge.

And it may get worse than that. A new study by Bryan Buckley and Sergey Mityakov of Clemson University found that that the cap-and-trade approach contained in a bill introduced last summer by Sens. Joseph Lieberman, I-Conn., and John Warner, R-Va., would, in effect, hit the average American household with a tax hike of $1,100 in 2008 - a hike that would rise to more than $1,400 in 2015. There goes that "single dime" - and then some.

Such a tax hike might be justifiable, arguably, if the result was more jobs. But significantly taxing our most reliable sources of energy will only increase unemployment by slowing an already dragging economy.

According to The Heritage Foundation's Center for Data Analysis of the Lieberman-Warner bill, cap-and-trade could result in job losses of 900,000 in some years. Americans should understand the costs of an energy tax, particularly in such tough economic conditions. Especially important, this tax falls disproportionately on the poor. Since low-income households spend a larger percentage of their income on energy, the tax is very regressive.

Worse, this high tax will all be for naught, as cutting carbon solely in the U.S. will change global temperatures by only a fraction of a degree.

Analysis by the Environmental Protection Agency shows that a 60 percent reduction in carbon-dioxide emissions by 2050 will reduce global temperature by 0.1 to 0.2 degree Centigrade by 2095.

A multi-lateral approach wouldn't fare much better. Just ask Europe. The Kyoto Protocol was a failure, and the ebbs and flows of the market are causing a number of hiccups in the EU's carbon trading plan. As a result, permit prices are falling, electricity prices are up and carbon reduction is negligible. And this doesn't even include two of the world's biggest polluters, India and China.

In a case of international cooperation, India, China and the rest of the developing world would have to revert to their 2000 levels of carbon emissions by 2050. On a per-capita basis, China would backtrack to about one-tenth of what the U.S. emitted in 2000. India and most of the developing world would have to drop to even lower levels. This scenario is a fantasy and would de-develop the developing world. So what can we expect from cap-and-trade? A lot of gain (in the form of tax revenue) for the federal government -- and a lot of economic pain for the American consumer.

And all for little, if any, environmental gain.

Nicolas Loris is a Researcher Assistant in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

First appeared in McClatchy