Placing a “price on carbon”: A great theory, but a terrible idea
It is becoming increasingly popular among industry analysts and some in the industry, itself, to advocate in favor of establishing a “price on carbon.” This would be either in the form of a “cap-and-trade” system which is little more than a thinly-disguised carbon tax, or an outright tax on carbon itself, sans all the cap-and-trade subterfuge.
Under a “cap-and-trade” system, the government first establishes a “cap,” i.e., a base volume of carbon that each entity is allowed to emit without incurring a penalty, otherwise known as a de facto “tax.” Those who want, or need, to exceed this “cap,” would have to either “trade” for emissions credits, the price of which is supposedly established on a free and open market, or pay a penalty into the system for the privilege of staying in business. I say “supposedly” in the previous sentence because, in the real world, such markets invariably end up being artificial and heavily regulated, due to the fact that politicians and regulators cannot resist the urge to attempt to control every outcome via statute or regulation.
Shifting the blame. An outright carbon tax produces the same result, i.e., a higher cost on producers of energy (Fig. 1), manufacturers, and any other industrial process via a direct tax, the rate of which would obviously be determined by politicians and bureaucrats in Washington, D.C. This approach is far simpler, direct and more transparent, which is why politicians and bureaucrats in the nation’s capital hate the idea. Our nation’s leaders far prefer a complex, opaque approach, because it gives them a better ability to shift blame for the inevitable negative outcomes that their policies produce.
This desire for plausible deniability is why, when President Obama and a Congress dominated by his own party wanted to establish a price on carbon back in 2009/2010, there was no serious discussion of pursuing an outright carbon tax; instead, they did their dead-level best to force through a cap-and-trade system that nobody liked or wanted. That effort failed by a single vote in committee, but the idea didn’t die.
Either way you go, what you get is a cost to society as a whole for the emission of carbon molecules over and above a certain threshold volume. And that cost is ultimately paid by consumers, either in terms of scarcity or higher prices, most often both. As time goes on in such a system, the threshold volume inevitably will go to lower and lower levels, and the cost of energy and other industrial products inevitably rises to higher levels. The alternative to paying the higher cost is doing without, i.e., scarcity.
But wait, some advocates say, only big companies would exceed whatever volume the wise people in Washington determine, either via statute or regulation—ordinary people wouldn’t have to pay it. This, of course, is simply not true, as any tax on any corporation, partnership or sole proprietorship that produces a product that is ultimately consumed by individuals, will always make its way into the price paid by said individuals.
There is simply no question—none whatsoever—that, if the federal government establishes a price on carbon, the cost of energy, manufactured goods, and anything else produced in this country via any industrial process will go up, and consumers will ultimately foot the bill. This is known, or used to be known, as Economics 101.
Another talking point that carbon price proponents like to use, as relates to the oil and gas, coal and power industries, is that these firms are already essentially bearing a cost for carbon emissions via the massive new regulatory regime coming down on these industries from the Obama administration. This talking point has the advantage of actually being true, as far as it goes.
Unfortunately, these same proponents then like to envision that much of this regulation would be unnecessary, were the government to establish a cap-and-trade system or a carbon tax. This point is also valid, as far as it goes—such regulation , theoretically, becomes largely unnecessary under such a system, as the price paid for emissions above the threshold would presumably encourage emitters to invest more to limit what they emit, as an alternative to buying credits or paying penalties/taxes. So, the concept of many such regulations being rendered unnecessary is valid.
But the thought that, just because regulations are rendered unnecessary, they would thus be repealed by the federal government is where this line of argument breaks down completely. This is, in fact, utter and complete nonsense. Well-meaning people, who favor implementation of price-on-carbon policies, should stop using this talking point as a part of their messaging on the matter.
Entrenched bureaucracy. This line of argument becomes especially invalid if Americans continue to elect presidents, who receive a large part of their campaign funding from the radical anti-development lobby on the political far left. It is from these groups, like the Natural Resources Defense Council, Wild Earth Guardians, the Sierra Club and the Center for Biological Diversity, that President Obama has, by and large, populated the bureaucracies at the Environmental Protection Agency (EPA) and Department of the Interior (DOI). These agencies have handed down the vast majority of the heavy-handed, command-and-control regulations with which the energy sector now struggles to comply.
Such anti-development groups are not really all that interested in improving air quality, a noble goal that already has been accomplished over the last 40 years. What they are truly interested in doing is hastening the demise of the fossil fuel industries. The best way they have found to do that is by controlling the regulatory mechanisms of the federal government. These groups now have managed to embed so many of their people, so deeply within these key bureaucracies, that even a Republican administration would have a very difficult time weeding enough of them out to halt, or even slow the momentum, behind increased regulation on the energy sector.
Ronald Reagan came into office in 1981 promising to weed out the comparatively small federal bureaucracy, as it existed at that time. What he and his political appointees discovered is that federal employment laws make it extremely difficult to remove even the most incompetent, subversive career bureaucrat from his or her position. As a result, when Reagan left office in 1989, he left behind a much larger federal bureaucracy than he had inherited.
Any new President, who has the goal of weeding out the anti-development activists that largely staff these environmental-regulating bureaucracies and replacing them with employees that would roll back such regulations, would find an array of roadblocks designed to frustrate any such action. The thought that such regulations—which form the basis for justifying the perpetuation of such massive bureaucracies in the first place—would actually be rolled back, thanks to the implementation of a price on carbon in any form, is laughable and simply a denial of political realities as they exist in Washington today.
Here’s a good example: The oil and gas industry faces the prospect of EPA issuing a proposed “existing source” rule, which would regulate emissions from oilfield equipment that was in place prior to EPA’s issuance of its “new source” rule under the Clean Air Act, Fig. 2. If Congress were to pass a carbon tax or cap-and-trade bill in 2017, and the new President were to sign it into law, does anyone believe that EPA would halt development of its “existing source” rule? More to the proponents’ talking point, does anyone believe that EPA would rescind its “new source” rule?
This is a valid question: In theory, establishment of a price on carbon would lead naturally to reductions in emissions of not only carbon dioxide, but also methane and all other types of emissions, as emitters introduce state-of-the-art technologies to make their equipment and processes cleaner. Thus, in theory, the price on carbon should replace the need for heavy-handed regulation of new and existing sources.
But in the real world, that is not remotely what would actually happen. In the real world, the anti-development lobby would pour hundreds of millions of dollars into advertising and social media campaigns. This effort would be designed to convince the public and policymakers that the regulatory infrastructure remains necessary, because corporations cannot be trusted to modify their behaviors, due to mere taxation. They would contend that the regulatory infrastructure remains necessary to protect the public, and policymakers whose campaigns are largely funded by such anti-development groups would feel immense pressure to agree.
And what about the regulatory bureaucracies? Does anyone really believe that the current army of entrenched career regulators at EPA and DOI would voluntarily dismantle the suite of command-and-control regulations that they have worked so hard to put into place during Obama’s second term in office?
Think about it this way: These are people whose livelihoods depend on not just maintaining the current level of regulation, but on constantly expanding it. This is not only job security to these people, it is the thing that gives them their sense of self-worth as human beings. Most of them really do believe they are saving the planet through what they do. Are we really to believe that they are going to just agree to do the work necessary to dismantle it all, because Congress has passed a carbon tax or cap-and-trade bill?
In theory, a carbon tax or cap-and-trade system designed to establish a price on carbon makes sense. In theory, such a system would be a free-market wonder that clearly sets the cost of emissions, enables companies to better plan their business years in advance, has no significant impact on the cost to consumers, and even allows the overall economy to function more efficiently.
But in practice, as we have seen repeatedly around the world, whenever it’s been tried, such a system is invariably subjected to too much bureaucratic control, becomes almost impossible for companies to comply with, dramatically increases costs on consumers, and becomes a major drag on the overall economy.
Bottom line: If we could just eliminate how things work in the real world, it’s all a wonderful idea. But we can’t, so it isn’t. 
