The beauty of a carbon tax – and its exemption for the poor

A carbon tax is, remarkably, back in the political debate. Three years after President Obama in effect abandoned a “cap and trade” proposal after opponents effectively mocked it as “cap and tax,” his re-election has made it politically safe again to utter the word “tax.”

Some lawmakers are considering a charge on the air pollution emissions of carbon, which is the leading greenhouse gas that causes global climate change. If that were to happen, the remaining policy challenge would be to impose the tax fairly on the American public, especially on people with low incomes. 

The policy arguments for a carbon tax are compelling. Economists have convinced the environmental community that market-oriented systems, as opposed to inflexible commands, are the best way to regulate. The simplest and most efficient way to change people’s behavior is to tax them; everyone is then encouraged to look for efficient ways to avoid the taxed activity.

One of the many benefits of taxing pollution is that government does not have to make any of the difficult choices inherent in subsidizing alternative energy – solar, wind, wave, geothermal, biomass, or nuclear – a dilemma that was painfully proven through the Obama administration’s half-billion-dollar subsidy of the ill-fated Solyndra (though most of the federal clean-tech investments have not failed). With a tax, the market, not the government, picks the winners. 

A carbon tax would hit big polluters, most notably electrical power producers. They would be encouraged to eschew carbon-laden coal for relatively cleaner natural gas, or even cleaner sources of energy. But they would not be mandated to do so; each producer would make judgments based on its own criteria and supply structures.

Both taxes and source conversions would be expensive, and these costs would be passed on to consumers. This is the nub of the political objections to a tax: It would eventually be borne by consumers.

A benefit of consumers paying for the tax is that they would be encouraged to make important choices – such as adjusting their thermostats, changing their light bulbs, or refusing to do so and paying the tax. As with any tax on consumption, however, poorer Americans would suffer more than wealthier ones.

A simple exemption, however, could make the tax burden much lighter for poorer Americans, while at the same time encouraging even greater conservation. The idea is simple: Each household would be exempted from the tax for a modest amount of electricity per month or year; the exemption would be most effective if the system also imposed only minimal usage charges for electricity below the cutoff. The system would recognize almost all households need to use some electricity, but that consumption beyond the minimum would be taxed.

It is no surprise that poorer households tend to use less electricity than richer ones – in large part because they live in smaller dwellings. Apartment households use on average only about half the electricity of detached single-family home dwellers; among other factors, apartment buildings help insulate each unit.

According to data from the Energy Information Administration, dwellings of 500 square feet or smaller used fewer than 5,000 kilowatt hours of electricity per year, or less than half that consumed by most big houses. If each household were given a 5,000 kWh yearly tax exemption, households who live in apartments, small houses, and mobile homes would typically pay little for their electricity. But households with bigger carbon “footprints,” who are mostly middle-class or affluent people, would pay much more.

In addition to helping the poor, a simple exemption would encourage energy conservation in an important but overlooked area – the mushrooming size of American houses.

While the number of people in a typical household has shrunk in recent decades (more than half of all households now consist of just one or two persons), house sizes have ballooned – the average new house in the 2000s was more than 2,400 square feet, compared to less than 1,800 square feet in the 1970s. Cheap electricity has been one reason.

A carbon tax with an exemption, by contrast, would spur a reversal of this trend. Americans who love big houses and consuming electricity would be free to act on their desires – only they would have to pay to do so. The solution would be both efficient and highly American.

Paul Boudreaux is a professor at Stetson University College of Law in Gulfport and Tampa, Florida. His article “The Impact Xat” is forthcoming in the University of Memphis Law Review.