Carbon pricing is an economic bomb and a tax on everything

Special Presidential Envoy for Climate John Kerry, the American Petroleum Institute and Democrats in Congress have all recently spoken in support of “putting a price on carbon.” This policy, if enacted, could raise the cost of nearly everything Americans buy, build and eat. A carbon price would make it more difficult for American entrepreneurs and innovators to create clean, reliable and affordable alternatives to coal, gas and oil.

A “carbon price” is designed to make carbon dioxide (CO2) emissions more expensive in one of two ways.

1) One is a direct tax applied to the manufacture or consumption of anything that releases CO2 into the atmosphere. That’s a new tax not only on coal and gas, but also on manufacturing, agriculture, construction and essentially every other productive human activity that releases CO2.

2) The other method of carbon pricing is through a cap-and-trade market. The government establishes an “acceptable” level of CO2 emissions and issues transferable credits allowing holders to emit carbon up to that limit.

Over time, the government can reduce the number of credits available, theoretically leading to a corresponding reduction in CO2. A carbon trading scheme is a tax paid by companies making the highest bid for the right to pollute.

Since virtually all productive activity requires energy and generates CO2, many businesses would pay the tax to government, and likely pass it on to consumers. Americans won’t merely feel the pinch at the pump — a carbon price will increase the cost of everything from the food we eat to the clothes we wear to the homes we buy.

Worse yet, by driving up the cost of energy a carbon price will delay the development of the new technologies the world needs to transition from fossil fuels. The greatest source of CO2 reduction in recent years has come from technological innovation enabling America to reduce its carbon emissions steadily since 2007.

In 2019, in one of the strongest economies in recent history, America’s CO2 emissions were the lowest since 1992. This reduction is due in large part to the fracking revolution, which made natural gas more affordable than coal, as well as increased energy efficiency. 

Despite increases in production from renewable energy sources in recent years, fossil fuels remain America’s most used, most reliable source of energy. A tax on carbon is a tax on energy and raising energy costs acts like a shockwave, driving up prices in every other sector of the economy.

Who could possibly think driving up the cost of everything is a good idea? It appears there is an emerging coalition of corporate leaders and the economically misguided.

Opportunists in the corporate sector seem to believe that advocating a new carbon tax will allow them to profit by claiming credit for emission reductions that are already planned.

Well-intentioned but misinformed environmental advocates believe increasing prices is necessary to reduce the “green-premium,” the excess cost of emission-free energy above that from CO2-emitting sources.

This latter group thinks green energy will prevail only if it becomes too expensive to use fossil-based fuels. Government must impose an artificially high levy on fossil fuels to drive price-conscious energy consumers toward the virtuous, green choice.

But we don’t need a new tax. Consumer preferences and existing policies are solving the problem. 

The market for green energy is already enormous. Corporations, endowments, governments and wealthy ESG minded investors are clamoring for it. The first person to develop an emissions-free, affordable and reliable source of energy will become instantly rich. The challenge in switching from fossil fuels isn’t a lack of incentives — it’s an engineering problem. Governments, private corporations and research labs across the world are racing to develop lower emission sources of energy. They don’t need higher conventional energy prices for encouragement.

The transition from fossil fuels will come when someone invents a reliable and affordable alternative — or several. Making everything more expensive by placing an artificial price on carbon won’t help innovators, and it will crush consumers. If our leaders really want to reduce emissions, they should favor policies that promote economic growth and technological innovation. That won’t happen by raising the price of everything.

Gregory Zerzan is an attorney with the law firm of Jordan Ramis PC, and was acting assistant secretary of the U.S. Treasury under President Bush.