Don't Be Fooled: Carbon Dividend Means Higher Taxes

Don't Be Fooled: Carbon Dividend Means Higher Taxes
AP Photo/St. Cloud Times, Jason Wachter, File

Former Secretary of the Treasury Hank Paulson, along with former Secretaries of State James Baker and George P. Shultz, is calling for a “conservative climate solution,” consisting of a carbon tax and a dividend that will be redistributed among American citizens. The redistribution of funds suggested by this plan should raise skepticism among lawmakers and constituents alike. This carbon dividend is simply a carbon tax cleverly disguised to get through a Republican Congress. The American people must ensure they are not bribed into an arrangement that will have negative long-term consequences, such as disrupted price signals, increased government bureaucracy, and a higher cost of energy consumption.

The dividend plan would initiate a $40 tax per ton of carbon dioxide emitted, to be paid at the upstream stage of energy production. Proponents claim that the tax would raise $200 to $300 billion per year and result in a carbon dividend of $2,000 to the average family of four. But these claims are highly exaggerated and are merely part of a scheme to buy positive public opinion for the initiative. While the plan seeks to mitigate future problems of climate change, the extent of those problems are masked by uncertainty.

To decide on the carbon dividend, proponents used the Social Cost of Carbon (SCC) metric, which is used by several institutions including the Environmental Protection Agency to calculate the costs of externalities associated with carbon dioxide emissions. Yet, the models used for these calculations employ arbitrary assumptions that “should not be used to guide climate policy decisions.” For example, the EPA uses discount rates of 2.5 percent, 3 percent, and 5 percent for its calculations, while the Office of Management and Budget recommends using a 7 percent discount rate for cost-benefit analysis.

In choosing arbitrary inputs for their models, proponents of the carbon dividend can get any result they desire. By contrast, a 7 percent discount rate, as is used in the Framework for Uncertainty, Negotiation, and Distribution (FUND) model — the only model that takes into account positive aspects of carbon dioxide —  yields negative values of SCC, meaning there is a net societal benefit to carbon dioxide emissions.

Simply put, the science behind this tax is mired in uncertainty. If the implementers of the tax knew all the information about the externalities of carbon and the “proper” amount of consumption, then a carbon tax might make sense in theory. However, as the House Science Subcommittees on Environment and Oversight have highlighted, that’s not our present reality. Moreover, there is no better way of conveying true costs and prices than through a free market.

The reality is that this tax on carbon dioxide would raise the cost of energy for consumers because fossil fuel producers will need to raise their prices as their incomes fall. Take Australia, for example, which implemented its own system of carbon taxes over a decade ago, only to repeal it in 2014 after outrage over economic stagnation and lost jobs. The negative economic effects of the Australian carbon tax became apparent the moment the tax was signed into law. The effects of the carbon dioxide saved during this period of dampened emissions, however, will likely never produce noticeable consequences. 

Another consequence of this carbon dividend system would be increased government bureaucracy. While proponents claim it would channel the tax revenue directly back to the American people, the reality is that an administrative force would be required to collect and divide up the money. The government should not be trusted with this plan because future changes to the plan are unknown. Once a carbon taxation system is in place, it will be easy for the feds to raise tax rates on carbon dioxide at an accelerated pace. Also, Congress could claim that new programs should receive some of the carbon tax funds, and the people’s dividend could be easily lessened. Thus a promise of a direct stipend is merely political gaming to buy popular support from people who would otherwise never support the carbon tax.

The carbon dividend is a tax by another name. Conservatives should nip this plan in the bud before it gains more ground in the Republican Party. Donald Trump campaigned on a platform of reining in excessive environmental regulations; his signature on this policy would be a betrayal of the Americans who elected him.

Richard Sigman works on energy policy and economic issues in the Washington, D.C. area. He holds degrees in petroleum engineering, petroleum economics, and business administration. He has worked as an engineer in hydraulic fracturing and pipeline gathering systems for oil and gas.

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