A Call for a Carbon Tax From Elon Musk...and Many Others
Congress should seriously consider a carbon tax, Tesla Motors CEO Elon Musk told me at the New York party last week announcing his company’s Motor Trend “Car of the Year” win. “We tax cigarettes and alcohol, so it seems like common sense, really.”
My question had actually been about EV subsidies. In his 2012 budget proposal, President Obama floated, though has not exactly fought for, increasing the current $7,500 federal income tax credit for battery vehicles to a $10,000, and reformulating it as a direct rebate so that consumers could claim it when they buy their car. Musk said he was unaware that proposal was even on the table. He supports it, but he still favors a carbon tax, with better electric car incentives as “the next best thing.”
The carbon tax may actually have more political support than the $10,000 EV rebate idea, because even some electric car advocates are hesitant to open up debate about EV incentives when an effective $7,500 credit is already in place. As one told me, "Why take the risk of all the public scrutiny?"
A Simple Idea...With Big Effects
The idea is simple enough. As the Wall Street Journal describes it, “Put a price tag on the harmful emissions from fossil fuels, such as oil and coal, and use the revenues to fund clean-energy development, pay down the deficit or slash taxes.” And indirectly, of course, spur electric car development by making them a more cost-effective transportation solution.
Musk is not alone in seeing a carbon tax—or at least a coherent national energy policy—as the best solution to reducing our foreign oil addiction and addressing global warming. Bill Ford, executive chairman of the company that bears his name, has long supported higher taxes on gasoline, and he told me that an energy policy could give Ford “some clarity about where the U.S. is going as a country.” Without it, he said, the outlook for green cars resembles “throwing darts.”
It will be fascinating to see if a carbon tax finally gets traction in Congress. Depending on how it’s applied, it could be a major boon for electric car sales by stabilizing higher gasoline prices. And, indeed, as Musk says, the value could be greater than Obama’s proposed ramping up of EV incentives. President Obama dodged an opportunity to commit to a carbon tax at his press conference Wednesday, but such polar opposites as the conservative American Enterprise Institute and the liberal Brookings are giving it serious consideration.
All sorts of policy makers support a carbon tax. “Putting a price on carbon is fundamental,” wrote Oxford professor Dieter Helm in a New York Times op-ed this week. “If consumers and businesses do not bear the cost of their carbon pollution, they won’t do much about it.”
And MIT has also weighed in with a report that calls a carbon tax a “win-win” for America. The authors, Sebastian Rausch and John Reilly, say that revenue from a carbon tax could offset the effects of the expiring Bush-era tax cuts. “In addition to economic benefits, a carbon tax reduces carbon dioxide (CO2) emissions to 14 percent below 2006 levels by 2020, and 20 percent below by 2050,” the report says.
Such a tax, they say, could also reduce oil imports 10 million barrels a day by 2050. “The carbon tax would shift the market toward renewable and other low-carbon options, and make the purchase of more fuel-efficient vehicles more economically desirable.”
The Politics of Carbon
But is a carbon tax politically possible? Even with a big mandate for Obama and his EV-favoring policies in the election, Republicans still control the House of Representatives. Co-author Reilly told me that the climate is now better than ever.
“For a long time we’ve seen that a carbon tax hasn’t been politically possible,” he said. “But perhaps now we have a perfect storm of factors lining up. First, we have a situation with the deficit where Congress is desperately looking for ways to enhance tax revenue without raising personal income tax rates.
Among all the tough choices that need to be made in that context, a carbon tax might stand out as a more rational solution. There has also been support from the right, with conservative economists like Greg Mankiw and Arthur Laffer supporting the idea.”
“The time seems ripe for this discussion,” said Harvard economist Makiw, who advised Mitt Romney during the Presidential campaign. “A carbon tax kills two birds with one stone.” Support from Laffer, author of the famous supply-side “Laffer Curve,” could be a good persuader for Tea Party sympathizers. Reilly offers this argument for fiscal skeptics.
"Right now, it may seem like you’re not paying for programs such as fuel-efficiency standards or subsidy programs," Reilly said. "But what you’re not paying for out of your front pocket, you’re paying for out of your back pocket through your tax dollars and—in the case of fuel standards—when you go to buy a car. A carbon tax would be coming out of your front pocket, which is why it has been such a politically toxic idea, because it has a visible impact. But what we’ve studied is how the money raised from a carbon tax could be used to lower other taxes. So it balances out. You’re paying taxes on things that aren’t good—like emissions—and not as much for things that are good—like income."
A carbon tax is, in fact, the market-based approach that many Republicans say they want. “That’s what this is,” Reilly said. “It would give businesses, and specifically utilities and energy companies, the certainty and flexibility to choose which future investments would save the most energy and money. We would also no longer need the piecemeal regulations that are both inefficient and ineffective.”
So a carbon tax is a timely idea, but some raise cautions. Michael Shellenberger and Ted Nordhaus of the Breakthrough Institute call themselves environmentalists, but have long clashed with the actual movement. They say a carbon tax can “play a useful role,” but disagree that it’s a panacea.
The pair say that Europe effectively has one through its cap-and-trade system, but there’s still an increase in the use of coal there. Worldwide, coal has gone from 25 to 30 percent of total energy, and greenhouse gas emissions are rising at three parts per million annually (an increase from the two ppm in the 1990s).
Europe is switching to coal because it’s much cheaper than natural gas there. In the U.S., cheap natural gas means the trend is exactly reversed—coal is doomed here, and American climate emissions are falling rapidly. A carbon tax definitely is not a one-stop panacea, but it clearly is win-win at this unique juncture in our history.
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