Carbon tax post-Paris

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One of the ideas raised in recent months that has provoked a certain degree of controversy within Vermont is the notion of a tax on carbon-based sources of energy. The idea has both pluses and minuses If parlayed correctly, it has the potential to be a net gain for the state. Handled poorly or one-dimensionally, as we've seen on occasion in the recent past within the state (Vermont Yankee being Exhibit A), it will backfire badly on its well-meaning advocates.

A little background is in order. Although it is widely panned today by many Republicans and other right-of-center political figures leery of anything that remotely smacks of tax increases, a tax on carbon, much like its cousin, a cap-and-trade mechanism, has in the past received significant support from economists who have served in Republican administrations. Gregory Mankiw, who was head of the Council of Economic Advisers under the George W. Bush administration, and an economic adviser to Mitt Romney for his 2012 presidential campaign, along with Paul Volcker, who served as President Reagan's Treasury Secretary, are among them.

The beauty of a carbon tax is its relative simplicity, transparency and straighforwardness. It directly taxes consumption of an item — in this case oil or other fossil fuels — and by elevating the cost of such commodities attempts to depress their use. Economists — along with ordinary working folks — have long understood the basic principle that if something becomes more expensive, people will use less of it. Tobacco taxes designed to discourage cigarette smoking are a good example. Cause-and-effect may not always be perfectly aligned, but it's hard to believe that the punishingly high taxes on cigarettes don't have a correlation with declines in smoking.

The main problem with a carbon tax is its regressiveness. It hits individuals of all income levels disproportionately. Adding 88 cents to the cost of a gallon of gas, as has proposed here in Vermont, probably won't stop your basic hedge fund manager from topping off their SUV to their heart's content. But will take a noticeable bite out of the spending leeway of those at less exalted levels of the economic spectrum. And while that cost can be at least partially offset by a rebate provision to folks who qualify for it, that probably still won't balance things out as cleanly and elegantly as it might appear on paper. But at least it's a way to recycle some of the money back into the pockets of those who need it the most.

Those who have been following the recently concluded climate change talks in Paris, which have resulted in what some are already labelling an historic agreement on the part of the global community to pivot away from carbon laden fuels like oil and gas in favor of cleaner renewable energy sources like wind and solar, know the idea of a carbon tax has gotten a boost. While the carbon reduction targets agreed to by the more than 150 nations represented at the talks may be less than what many environmental advocates hoped for, meeting those targets will pose a stiff challenge. Phasing down the use of coal and oil over the coming decades will impose hardships on those industries and their employees, as well as for some nations, like China and India, who may still feel they haven't reached the point where they can relax in their drive for affluence. Western industrialized nations have had the luxury of becoming rich (relatively speaking) before they had to get creative about environmental concerns, but the "developing" nations won't. At the same time, concerns abut greenhouse gases and climate change are relatively new — 100 years ago this was not an issue. And those developing nations have the opportunity to leapfrog into the future and not having to struggle with finding jobs for displaced workers or unwinding whole industries. Hopefully, there will be time to do all of that in an orderly way.

Back here in Vermont, with its increasingly conflicted stance on greenish environmental measures (widespread controversy about the siting of wind and solar farms being the prime example), a punitive carbon tax, enacted unilaterally, would be a mistake at this time, we believe, A five or 10 cent increase may be one thing; 88 cents per gallon is quite another. On the one hand, this is a good time for considering a carbon tax, with the price of gasoline and heating oil at lower levels than we've seen in awhile. The converse of a carbon tax is also true — people will drive more if gas is cheap, and buy more gas guzzling vehicles as well. But the main reason to go slow on a whopping 88 cent tax — whose momentum, to the extent that existed at all in the first place, has eased off considerably — is that Vermont can't be the only state in the region to impose such a tax increase on residents and visitors alike. That would add a very unwanted burden on the state's economy at a time when it can't afford that. It's either a regional or better yet, a national solution — or a marginal one, to help replenish the federal highway trust fund that finances road maintenance and infrastructure improvement — but this is a case where going it alone, or being the first, makes no sense, just like a single-payer health insurance scheme proved to be.

But there's no need to throw the baby out with the bath water. Done correctly, a carbon tax does makes sense, and doing so in a limited way wouldn't be a disaster. But the state's economy is far too fragile right now for the sort of bold experiment some are calling for. Splitting the difference, particularly given the state's shaky budgetary condition, might offer some grounds for moving forward in the absence of a national approach, which may or may not be coming depending on who wins next year's Presidential election.


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