Conservatives are now debating carbon taxes. Here's why many are still skeptical.

On Wednesday, two Democratic senators unveiled a carbon tax bill meant to address global warming. That in itself wasn't unusual. What was notable was where they did it: at the conservative American Enterprise Institute, which hosted a wide-ranging debate about the proposal afterward.

Carbon taxes have long been the great winged unicorn of climate policy. Economists love 'em: Just make oil, gas, and coal more expensive (to compensate for the environmental damage they cause), and people will have proper incentive to reduce emissions. Markets will work their magic. What's more, some conservative luminaries, like Reaganomics architect Art Laffer, have warmed to the notion, since it's less intrusive than endless EPA regulations. So, even though they've been politically unpalatable thus far, liberals and enviros keep hoping there might be common ground here.

"With this bill I'm extending a hand to conservatives everywhere"

Hence the AEI event, where Sens. Sheldon Whitehouse (D-RI) and Brian Schatz (D-HI) proposed a bill to tax fossil fuels, starting at $45 per ton of carbon dioxide and steadily rising each year. That tax would be offset by corporate tax cuts and cash rebates sent back to households, so that the size of government would remain unchanged. This is more or less what conservative carbon-tax backers like Laffer have called for.

"With this bill I'm extending a hand to conservatives everywhere," Whitehouse said. Yet there was still plenty of hostility to the idea in the audience — an indication of how much distrust there is between the two sides on climate. And the debate that followed offered a revealing glimpse of just how hard a sell a carbon tax would be on the right.

The Whitehouse-Schatz carbon tax is designed to appeal to conservatives

This is Sheldon Whitehouse. He'd like to tax carbon. (Mandel Ngan/AFP/Getty Images)

A carbon tax gets levied on fossil fuels at the source — at the coal mine, at the natural gas processing plant, at the oil refinery. The price signal would then ripple through the economy, giving people incentive to reduce fossil fuel use, either through improved efficiency or by finding cleaner alternatives. Given a high enough tax, it would be more economical for, say, a utility to build a solar farm over a gas plant.

But one crucial question is how high the tax should be. The Whitehouse-Schatz carbon tax starts at $45 per ton of CO2 and rises 2 percent annually. This number is based on the Obama administration's estimate of the "social cost of carbon" — an attempt to calculate the damage fossil fuels cause from pollution and global warming. (More on this below.)

To put that in perspective, this tax would initially raise gasoline prices by about 38 cents per gallon. Coal would get hit harder than natural gas, since it's more carbon-intensive. And despite the "carbon tax" moniker, methane and other greenhouse gases also get taxed accordingly.

A tax that big would cut America's CO2 emissions 40% below 2005 levels by 2025, one study found

Economic models suggest a carbon tax this big could cut America's CO2 emissions 40 percent below 2005 levels by 2025. (That cut isn't guaranteed, it's just an estimate of how companies would presumably respond.) The Whitehouse-Schatz carbon tax would keep rising until CO2 emissions fell 80 percent.

The tax would also raise an estimated $2 trillion over 10 years. In theory, the federal government could use this money for anything. Pay down the deficit. Fund clean energy. Fund pre-K. But the Whitehouse-Schatz bill would use the revenue to:

• Cut the corporate tax rate from 35 percent to 29 percent (costing $600 billion over 10 years)
• Offer every worker a $500 annual credit against their payroll taxes, rising with inflation ($750 billion)
• Provide retirees, veterans, and the disabled a $500 annual credit, rising with inflation ($400 billion.)
• Create a block grant program for states to assist poor or rural households hit by rising energy costs ($200 billion)

This is a move crafted to appeal to conservatives. The bill doesn't just hike taxes and use the money to fund vast new federal government programs. It hikes taxes on something we'd like to discourage (CO2 pollution) and offsets it with tax cuts on things we'd like to encourage (income and labor). You could think of it as a tax shift.

Crucially, the carbon tax would also be levied on imports from any country that doesn't have its own carbon-pricing program. The idea is that this would stop companies in the United States from moving to China just to avoid the carbon tax. Meanwhile, US companies exporting to nations without a carbon price would get refunds at the border — again, so that exports aren't at a competitive disadvantage. (Here's a detailed look at how this might jibe with World Trade Organization rules.)

But conservatives still had 5 big objections to a carbon tax

It was like this, but more eloquent. (AFP PHOTO/Greg WOOD)

After the announcement, Whitehouse and Schatz took questions from a rather skeptical audience. AEI then hosted a debate between two conservatives: Jerry Taylor of the Niskanen Center (who's pro-tax, as he explained to Vox here) and Benjamin Zycher of AEI (who's against it).

By and large, there wasn't a ton of enthusiasm for the idea, and it's worth breaking down some of the specific objections, because they give some sense of how far we are from any sort of bipartisan breakthrough:

1) The price is set too high. During the debate, Zycher took issue with the idea that $45 was the right number for the tax.

This number, he said, was based on a White House estimate of the damage that global warming from our fossil fuels imposed on the entire world, rather than just to the United States — which skewed the cost-benefit analysis. It's also based on contestable assumptions about discount rates — basically how much we value future generations. If you tweaked those assumptions, you could end up with a lower number. (Zycher laid out his views at length here.)

If Congress ever did consider a carbon tax, this number would be a major source of contention. There's no obvious "right" answer for what the tax should be set at. Some environmental groups would argue that the social cost of carbon should be far higher. Taylor, for his part, pointed out that the climate damage caused by fossil fuels is certainly higher than zero — which argues for some sort of tax. But, again, how high?

2) Some conservatives don't believe the tax would ever actually be revenue-neutral. Taylor argued that if you swap a carbon tax for other tax cuts, the economic impact is likely to be pretty minimal. After all, we need some money to fund government. So why not a carbon tax?

"I cannot envision a public choice model in which we raise energy costs for everyone and cut corporate taxes"

Zycher, by contrast, countered that he simply didn't trust that an economically efficient tax swap would ever be politically sustainable. "I cannot envision a public choice model in which we raise energy costs for everyone and cut corporate taxes," he said. "So you’ll end up spending [more than 100 percent] of the revenue to subsidize groups. There will be an increase in government."

It's worth noting that British Columbia has a real-life carbon tax that did manage to pull off a straight swap — it started at $10 per ton in 2008, and the proceeds went toward cutting corporate taxes and tax rates on the bottom two brackets. But that's a smaller tax than what Whitehouse-Schatz are envisioning, and it's not implausible to think that a real-life carbon tax might look significantly messier once Congress was done with it.

3) What if the US acts but China doesn't? This came up again and again in both the debate and Q&A sessions. Zycher noted that if the United States imposed carbon pricing but developing countries like China or India didn't, it would have a negligible effect on global warming.

Taylor conceded that was true, but you've got to start somewhere. "I can’t say global action will happen," he said. "We may fail. But I know if the US permanently puts aside aggressive action on climate change, we will never have any chance of a global agreement."

Taylor also noted that if the carbon tax had a border adjustment — and was levied on imports — that might help convince other countries to get on board. (To add to this, it's worth pointing out that China is, in fact, experimenting with its own carbon-pricing schemes.) Even so, this is likely to be a big recurring objection.

The tax starts here. (Shutterstock)

4) Climate change isn't really a problem — or at least not as big a risk as bad policy. The dominant sentiment among Republicans in Congress is that global warming either isn't real or isn't worth addressing, and this view was well-represented at the AEI event. Zycher even managed to slip in a few misleading feints about how Antarctic sea ice is growing.

Taylor, for his part, tried to articulate a conservative case for worrying about climate change. We still don't know exactly how much the world will heat up this coming century. But evidence suggests there's at least a small chance we could see really drastic warming if emissions keep rising — 11°F, say. There's a "fat-tail risk," in other words. And doing nothing about that risk would be absurd, and contrary to how we act in every other area of life.

"We don’t act that way in financial markets," Taylor said. "If you knew there was a 10 percent chance that we’d have a major economic downturn along the lines of the Great Depression, would you continue to invest in equities? Heck no. You’d hedge." Think of climate policy as insurance against catastrophe, he said.

Some conservatives had their own counterargument to this. During the Q&A session, Marlo Lewis of the Competitive Enterprise Institute argued that there was also a fat-tail risk against bad policy. What if, say, we enacted a massive global carbon tax and it left millions of people in the developing world in poverty? (One might interject that we can always reverse carbon policies that prove disastrous, whereas we can't reverse 6°F or 8°F or 11°F of warming, though no one did here.)

5) Conservatives don't trust Democrats. This was another running theme throughout the debate. Andrew Moylan of the R Street Institute, who actually supports a revenue-neutral carbon tax, told both Whitehouse and Schatz that the issue has become far too polarized for either side to trust each other. Republicans, he said, were embittered that, during they Keystone XL vote, Democrats kept putting forward amendments meant to highlight the GOP's climate-change denial — which, Moylan said, was "not terribly relevant from a policy perspective." (Schatz, for his part, replied that it was entirely appropriate to pressure senators who don't believe in climate change.)

Similarly, other conservatives in the audience kept asking why Whitehouse wanted to put climate skeptics in jail. Whitehouse explained that this wasn't his view. Rather, in May, he had broached the idea of using civil anti-racketeering laws against fossil fuel industry officials who conspired to mislead the public about climate change — much as RICO was used against the tobacco industry. "But it's not jail, and it's not just for being a skeptic," Whitehouse said.

Even so, this RICO point came up again and again, even after Whitehouse had left the building — as good a sign as any that we're still miles away from any sort of bipartisan harmony on climate.

Further reading:

• An interview with libertarian Jerry Taylor on why he now supports aggressive action on climate change
• Big oil wants a price on carbon. That's not as weird as it sounds.

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