If You Get Too Cold, I'll Tax the Heat

The carbon tax has never gained much political momentum, but if cap-and-trade is defeated, then it might be dragged out again, peddled as an efficient, market-oriented approach to encourage wise use of carbon resources. This new incarnation may seem preferable to the old one, but it is still bad policy.

One of the leading proponents of the carbon tax is NASA scientist James Hansen, humbly described on the dust jacket of his new book as "the World's Leading Climate Scientist." The aforementioned book bears the melodramatic title, Storms of My Grandchildren: The Truth About the Coming Climate Catastrophe and Our Last Chance to Save Humanity. (Not to quibble, but what exactly does "storms of my grandchildren" mean?)

When Hansen came to Cambridge to hawk his book, I was prepared to come face to face with a fanatic. He is notorious for suggesting that energy company "CEOs should be tried for high crimes against humanity and nature." He has hysterically likened coal trains to "death trains -- no less gruesome than if they were boxcars headed to crematoria." And he hypocritically complained for eight years that President Bush was muzzling him -- accusations which appeared in hundreds of unmuzzled news conferences.

I was surprised to find that Hansen is not entirely delusional. He rejects the cap-and-trade approach championed by Al Gore/Copenhagen/Kyoto, preferring a revenue-neutral carbon tax, which would be entirely refunded to the American people -- an approach he calls Carbon Tax and 100% Dividend. When asked in the Q&A if it wouldn't be better to funnel the carbon tax into government funding of clean energy, he replied that the market does a better job of choosing effective technologies. His mistrust of big government sticking its fingers in the carbon tax pie was gratifying.

Hansen's carbon tax would work as follows: The carbon in oil, gas, and coal would be taxed at the equivalent of $1 per gallon of gasoline, which would amount to an annual tax of $670 billion. For comparison, the 2010 Department of Defense budget, including Iraq and Afghanistan operations, is a nearly identical $664 billion. Significant pocket change.

This bonanza would then be redistributed to the American people based on a system of shares whereby every adult gets $3,000/year. Children get half a share, so a family with two children would have $9,000 a year deposited into their bank account. An individual using less than the equivalent of 3,000 gallons of gasoline per year profits from his low-carbon lifestyle. Carbon spendthrifts, on the other hand are penalized, which subsidizes those who live sustainably.

Hansen is probably correct that a carbon tax would encourage energy conservation. When prices rise, demand falls. Energy conservation per se is not bad -- increasing efficiency, insulating houses, turning off lights in empty rooms, and turning thermostats down while we sleep all make sense. Driving fewer miles in smaller, less safe cars or living in houses whose temperature is closer to the ambient air also make sense if, like Hansen, you indulge in magical thinking, believing that small steps will prevent the apocalypse.

In other ways, the carbon tax will produce questionable results:

1. The primary objective of taxing carbon is to spur development of non-carbon-based energy. Hansen believes that we must eliminate coal, which currently provides half of the nation's electricity, by 2030. It is encouraging that Hansen remains "open-minded" about nuclear power, citing the safety and efficiency of the fourth-generation lightwater reactors.  Nuclear power is a more realistic replacement for coal than any of the negligible renewable sources (current capacity -- wind: 0.7%, solar: 0.1%, geothermal: 0.3%, biomass: 1.3%). But even so, consider the numbers: The capacity of coal-based electrical generating capacity in the United States is 315,000 megawatts. Our 104 nuclear plants currently have a total capacity of 100.2 Mw. We therefore would have to add three times our existing nuclear capacity. An average nuclear plant provides around 1,000 Mw; in other words, we would need to build 315 new nuclear plants in a political environment where it was considered a breakthrough when President Obama supported loan guarantees for two new nuclear plants.

2. Hansen believes that putting carbon tax money in people's pockets will stimulate the economy. As with any government stimulus, the money first has to be taken out of the economy, so it's unclear how this elaborate process will add to wealth. When the carbon tax is redistributed, it will end up in different pockets. It will be taken from producers and given to consumers, and it will as a general rule be taken from the rich and given to the poor. Carbon tax advocates assure us that rich people use more energy, so the tax will be progressive; Hansen's example of someone with a high-carbon lifestyle is a person with a vacation home. Hansen's redistribution also sneaks in some social engineering: Shares are given to a maximum of only two children, penalizing larger families with larger carbon footprints in the form of larger houses, cars, and grocery bills. Even at this stage, Hansen's tax favors special interests. Wait until it enters the political arena.

3. Hansen admits that the carbon tax will penalize U.S. manufacturing, and he suggests two solutions: We persuade China to impose a carbon tax (good luck with that -- and what about the remainder of the world?), and we add tariffs on products coming from countries that don't tax carbon. He didn't mention what global mechanism will be used to impose these protectionist measures. Wouldn't this violate the GATT? He also does not explain how American exporters can compete globally with higher energy costs.

4. Hansen suggests that by taxing energy "at the wellhead" -- the point where it first enters the economy -- its effects will be felt only in energy products that are sensitive to price signals -- gasoline at the gas pump, for example. Adding a tax to energy, however, will obviously ripple through the entire economy, increasing manufacturing and transportation costs. Hansen likely believes that we will turn to local food and buy products with a smaller carbon footprint once the "real" cost of production is communicated via price. In many cases, however, energy costs contribute to only a small part of the total product cost. Aluminum is energy-intensive, but it accounts for a small part of the price of a can of Coke. Labor costs, large-scale production methods, and favorable growing conditions for food are often more significant in determining price. Taxing carbon will make New Zealand apples and Chinese semi-conductors more expensive, but not so expensive that they cannot compete with local products. Thus the carbon tax will add to inflation across the board, but in many cases, it will not reduce use of carbon-based energy.

5. Finally, even if the Department of Carbon Tax Reimbursement returns 99% of the taxes collected, minus shipping and handling, that's still another $6.7 billion added to the budget.

If climate doomsday is a chimera, then reducing CO2 is a pointless sacrifice of the quality of life we have achieved after centuries of progress. The choice between cap-and-trade and a carbon tax is irrelevant. Depriving terrorists of oil revenue and meeting our growing energy needs can be better achieved by expanding domestic fossil fuels and nuclear power. Go nuke. Drill, baby, drill.

Peter Wilson is a writer who blogs at walkingdogcapitalist.