A Taxing Route to Oil Security
(FORTUNE Magazine) – Now that we're all feeling queasy about being so reliant on Middle Eastern oil, what can we do about it? Answer: carbon tax.
In Washington, even mentioning a carbon tax is seen as a very fast track into the political wilderness. But that could change. America has been a leader in marshaling market forces for environmental purposes: It was under the elder Bush that the U.S. pioneered the buying and selling of emission credits so that firms could reduce sulfur dioxide pollution. Carbon taxes are very much within that tradition. In a Nixon-goes-to-China kind of way, it offers the younger Bush a great opportunity.
A carbon levy, as the name implies, taxes fuels on the basis of their carbon content. The effect is to make cleaner energy sources less expensive than dirtier ones. Coal, which has the most carbon, would be hardest hit; renewables like biomass, hydro, wind, or solar would not be taxed at all; and oil and natural gas would be in between. One result: The price difference between fossil fuels and alternatives would narrow.
Oil is a relatively small portion of America's power generation, so in the short term a carbon tax would do little to reduce our dependency. It's in the long term that things get intriguing. A carbon tax reduces the economic advantage that the internal combustion engine has over hybrids (which use a mix of electric and gas) and fuel cells. It would therefore accelerate progress toward a hydrogen economy.
There are two, maybe three, objections to a carbon tax. The first is economic: A carbon surcharge would reduce competitiveness, and the coal, utility, railroad, and oil and gas industries would bear the brunt of the costs. Economists like Lawrence Goulder of Stanford University say that can be mitigated by targeted tax cuts or by exempting specific industries.
The second objection is that a carbon tax is a cover to raise taxes overall. (The Clinton Administration's BTU tax went down in flames in 1993 on just that basis.) But in the European countries that have experimented with carbon-ish taxes--Sweden, Denmark, Germany, and the Netherlands--the proportion of GDP consumed by the state has actually dropped in the last decade.
The third is that the idea is just nuts. And it's true that in Washington, carbon taxes go over about as big as, say, peasant skirts at a Georgetown soiree. That said, carbon taxes are being taken seriously by people who would not be seen dead in Birkenstocks, including the OECD, the National Bureau of Economic Research, and any number of dweeby economists. Are you listening, Capitol Hill?