Could a Revenue-Neutral Carbon Tax Be the First Step to Fight Climate Change?

John Sweeney

When it comes to combating climate change, Representative Alexandria Ocasio-Cortez’s Green New Deal is currently the fashionable solution of the liberal Left. Since its botched rollout in February, anyone with common sense has conceded that the plan’s utopian promises of guaranteed jobs, government-funded health care, and an expanded social safety net give it little chance of producing real legislation. American taxpayers should be relieved; the conservative think tank American Action Forum estimates that it would cost as much as $93 trillion, or roughly 450 percent of the United States’ current GDP, to implement.

Such is the unimaginative and irresponsible approach to public policy that has become a mainstay of modern Democratic politics: Any problem, no matter how complex, can be solved if we throw enough money at it.

Fortunately, Republicans in Congress have finally woken up to the problems of climate change and are proposing their own solutions. Senator John Cornyn has announced that he’s working to draft bills that would promote research on clean-energy technologies. Likewise, Senator Lamar Alexander has outlined a “New Manhattan Project” to develop cleaner energy through nuclear power, cheaper solar technology, electric vehicles, better batteries, and carbon capture. These are exciting developments for environmentally conscious conservatives, who have long advocated for the GOP to awaken to the dangers of climate change.

Additional Republican proposals are in the works, and unlike their spendthrift counterparts on the liberal Left, they take the more responsible and realistic approach of harnessing the power of free markets to influence behavior. Conservatives’ faith in free markets rests on the belief that millions of individuals acting in their own economic self-interest are more efficient (and powerful) at allocating resources to accomplish an objective than bureaucrats in government. And the most targeted and effective free-market policy to incentivize reduced carbon emissions, the primary cause of climate change, is a carbon tax.

A carbon tax would drive investment in new technologies and spur innovation both by providing a financial incentive to reduce emissions and by giving markets a steady price signal. A set price per ton for carbon emissions — along with gradual, scheduled increases in the tax rate over time — would establish the market certainty needed to influence long-term decision-making. Investors and businesses could more reliably forecast the payback period and return on investment for clean technologies, projects, and processes. Companies that save on carbon taxes through innovation would soon be able to undercut more carbon-intensive competitors on cost. An intense race to reduce emissions would sweep every corner of the U.S. economy.

Carbon taxes also hold the most promise for fostering global cooperation on the issue. If the U.S. simply invests in clean-energy technology to reduce or eliminate reliance on fossil fuels, two things will happen: We will emit less carbon, and the rest of the world will emit more. If we stopped buying fossil fuels, the price of those fuels would fall. China, India, and other developing countries would exploit this cheap-energy bonanza, offsetting our emissions reductions. This “leakage problem” has proven one of the greatest obstacles to forging global climate cooperation.

A properly crafted carbon tax would mitigate leakage through “border adjustments” in the form of import tariffs. Carbon-based import tariffs are an essential component of any carbon-tax plan for two reasons. First, tariffs ensure that a carbon tax would not unfairly penalize domestic U.S. industries. Second, the tariffs would be designed to exempt countries with a similar domestic carbon-tax regime. Foreign governments, eager to keep their exports competitive and not minding the extra tax revenue, would be incentivized to enact their own carbon taxes. If America led, the world would follow.

Despite the compelling case for a carbon tax, most Republicans still balk at the idea. How could a tax, of all things, promote innovation? But the simple truth is taxes do foster innovation: They encourage tax dodging. The more taxes get enacted, the more intricate and creative the schemes to dodge them become — and the simplest way to dodge a carbon tax is to emit less carbon. In this manner, a carbon tax would spark an explosion of emissions-reducing R&D throughout all sectors and industries.

The fight against climate change is a marathon, not a sprint. The policies we craft today must fuel innovation and research for many decades to come. Public investment in clean-energy and carbon-capture technologies is laudable, but it’s not enough on its own to reduce global emissions, because of the “leakage” problem. Carbon taxes have, to be sure, been met with intense political resistance in many places where they’ve been proposed, including the U.S. But they are the most pragmatic solution and — importantly for conservatives — could be designed to be revenue-neutral and thus not result in an expansion of government. If Republicans hope to craft meaningful climate legislation in everyone’s long-term interests, a carbon tax is a necessary first step.