Whitehouse and Schatz Pitch Newer, Friendlier Carbon Tax – But Is It Friendly Enough?

A new effort to tax carbon dioxide emissions, courtesy of Sens. Sheldon Whitehouse (D-R.I.) and Brian Schatz (D-Hawaii), was unveiled today at the American Enterprise Institute in Washington. With support from big oil companies, some right-leaning groups and most Democrats, a carbon tax might be the most “politically popular” policy available to fight climate change.

But the conditions for assuring a bill safe passage through Congress aren’t ripe. Whitehouse and Schatz will have to bridge wide-ranging interpretations of how exactly a carbon tax would work.

The bill proposes to reduce carbon emissions by more than 40 percent below 2005 levels by 2025, but offers up a big bargaining chip: lowering the top marginal corporate income tax rate from 35 percent to 29 percent.

The venue for the announcement, the conservative American Enterprise Institute, was deliberate. Before details of the American Opportunity Carbon Fee Act were released, Whitehouse said in an interview that he chose AEI to “reach out to the other side” and to show the bill has “conservative cred.”

GOP lawmakers, for the most part, have long danced around the issue of climate change. While an absolutist rejection of the science isn’t as widespread in the party as it was a few years ago, only a handful of Republicans – a mere five in the Senate, for example – have gone on the record saying climate change is real and caused by human activity.

“The tricky thing that has to be focused on is that when people say ‘carbon tax’ they mean different things” depending on their political party, said Oren Cass, a senior fellow at the Manhattan Institute for Policy Research. “The Venn diagram of what people are talking about has no overlapping area.”

“The Venn diagram of what people are talking about has no overlapping area.” – Oren Cass, senior fellow, Manhattan Institute

For the left, a carbon tax typically means rebating money to households, either through direct payments or tax credits. Cass said that rebates would drag down economic growth, and that it couldn’t be done through the income tax system because a carbon tax would hit poor families the hardest via higher energy costs.

Because many low-income households do not pay income taxes, and in some cases no payroll taxes, they wouldn’t benefit from a tax rebate, so you’d need to get the federal government into the business of “mailing everybody in America a check every month,” Cass said – a nonstarter with conservatives.

For those on the right, a carbon tax is generally seen as a consumption tax that would be used to lower corporate tax rates. While Whitehouse and Schatz’s bill would lower the top corporate tax rate, it doesn’t qualify as revenue-neutral since it uses money to fund government programs like veterans’ benefits.

Republicans also assume “it would have to be paired with a repeal of other greenhouse gas regulations,” Cass said. That includes the administration’s Clean Power Plan, President Obama’s legacy climate rule limiting emissions from power plants.

For lawmakers representing deep red states, leaning left on climate change could be political suicide. Former Rep. Bob Inglis (R-S.C.) knows that story all too well. After six terms, Inglis was ousted from his seat after he said in 2010 that he believed in man-made global warming. But he said in an interview yesterday that the conservative mantra on climate change is starting to shift. “There’s a dawning awareness of the power for free enterprise to fix climate change,” he said.

If Inglis is right, that could mean that a carbon tax, which is described as the most market-friendly approach to regulating greenhouse gas emissions, is gaining traction. “Whitehouse is taking a real risk and showing some real courage by pairing a carbon tax with a corporate income tax reduction – that kind of courage can be inspiring,” Inglis said, adding that it may enable conservatives to finally get on board with a policy solution for climate change.

But some policy experts are skeptical Congress can ever strike a deal on a carbon tax.

David W. Kreutzer, a senior research fellow at the Heritage Foundation, a conservative think tank, agreed that it was almost politically impossible to have a carbon tax that would get support from conservatives. Achieving the desired emissions cuts while also repealing, dollar-for-dollar, all other carbon regulations is “so far from likely that it’s not worth discussing,” he said. Kreutzer added that a grand bargain on a carbon tax wouldn’t be enforceable or likely to happen.

But not everyone thinks the differences run too deep. Jerry Taylor, a former Cato Institute scholar who recently founded his own libertarian organization, the Niskanen Center, said a revenue-neutral carbon tax that also displaces other regulatory programs is well within reach.

“For Congress, the issue isn’t whether to legislate. That ship has sailed. The issue is how best to go about it,” Taylor said. He said because a carbon tax would reduce emissions by the same amount that the Clean Power Plan is alleged to reduce, it wouldn’t be long before Democrats embraced the idea of pricing carbon in exchange for loosening environmental regulations elsewhere, sweetening the deal for Republicans.

There’s no telling how that might sit with Democrats, as Congress has never voted on such a proposal.

Taylor said he doesn’t think this Congress has any chance of passing a carbon tax, but that it would be a different story in 2017. “I hear the same narratives on both sides of the aisle,” Taylor said. “They look at this proposal and they agree it would be an improvement and that it would be worth their support, but they doubt the other side would embrace it.”

Once legal challenges to the Clean Power Plan are resolved, and – assuming the rule is upheld – Republicans realize it’s here to stay, they’ll start to take carbon tax legislation more seriously, Taylor said. He also said he could see a carbon tax coming up in negotiations over tax reform or deficit reduction, or with a new president.

“I could imagine a carbon tax emerging after a Clinton victory,” he said.

Inglis, who now heads the Energy and Enterprise Initiative, a public engagement campaign promoting free market solutions to climate challenges based out of George Mason University, said it will take a conservative president to pass a carbon tax.

“We don’t trust people with their hair on fire to solve problems,” Inglis said. “We trust people who have measured the problems and say there’s a solution that works.” He mentioned GOP presidential candidates Sen. Lindsey Graham (S.C.), former Florida Governor Jeb Bush and Sen. Rand Paul (Ky.) as people who “may break out of the great recession style of denying the existence of the problem.”

You can find a summary of Whitehouse and Schatz’s bill here.

Morning Consult