A Carbon Tax — Or Just More Energy Science Research?

On Election Night last week, President Obama made a point of mentioning climate change: “We want our children to live in an America that isn’t burdened by debt, that isn’t weakened up by inequality, that isn’t threatened by the destructive power of a warming planet.”

That, along with superstorm Sandy, was enough — at least for the moment — to put the issue back on the national radar. And as it so happens, Brookings is out with a plan for a carbon tax. It would start at $20 per ton of carbon dioxide, rising 4% per year in real terms. Over a decade, it would raise on average $150 billion a year while reducing carbon dioxide emissions 14% below 2006 levels by 2020 and 20% below 2006 levels by 2050. Brookings proposes would set aside “at least the first $30 billion of revenue annually for clean energy- and energy efficiency-related RD&D” while allocating the remaining $120 billion a year ”to tax cuts and deficit reduction as well as rebates to affected low-income households.”

AEI’s Ken Green thinks implementing a carbon tax would be a mistake for a variety of reasons:

There would be virtually no environmental benefits to unilateral greenhouse gas emission reductions by developed countries (whose GHG levels are already flat and slowly declining), while developing countries are pouring out virtually every kind of pollutant with joyous abandon. … Low carbon taxes won’t have a significant effect, and high carbon taxes won’t retain political support long enough to provide environmental benefits. … Energy taxes also make countries less competitive when it comes to exports, particularly when they’re competing against countries that don’t impose comparable taxes.

But his strongest point, to me, is that the way most carbon tax proponents want to implement the levy makes for bad economics. How can you accurately price carbon while keeping myriad layers of government intervention from efficiency standards to regional trading systems to subsidies? Indeed,when a group of AEI scholars proposed a carbon tax, they addressed that very issue, substituting a tax on emissions for a) subsidies for ethanol and other alternative fuels, b) business and household energy tax credits, and c) regulations designed to lower greenhouse gas emissions. All those market interventions would be repealed or abolished. If you really want to address climate change in a pro-market fashion, that’s where you begin.

But I think the politics for a carbon tax remain daunting, especially given the Long Recession. Anyway, U.S. carbon emissions are already decreasing, down over 10% since 2007. That’s partly due to the Great Recession, but also the natural gas revolution. Fracking technology may allow natural gas to be a bridge fuel to this:

A technology is in the pipeline that has the potential to eliminate CO2 emissions entirely. Solar power, long believed to be unworkably expensive, has actually been falling in cost at a steady exponential rate of 7 percent per year for the last three decades straight. Because of this “Moore’s Law for solar”, electricity from solar panels now costs less than twice as much as electricity from coal, and only about three times as much as electricity from gas. Furthermore, technologies now in the pipeline seem to ensure that the cost drop will continue.

Within the decade, solar could be cheaper than coal. Within two decades, cheaper than gas. When that happens, assuming we also have electric cars, it is game over for carbon emissions.

So let innovation work its magic, with a bit of a nudge from increased government investment in energy science.