The Carbon Regulatory Cocktail Can’t Be Unmixed

Proponents of a tax underestimate the difficulty of unwinding a host of federal, state, and local greenhouse gas subsidies and regulations

This piece originally appeared on the City Journal website and was coauthored with Jordan McGillis, City Journal’s economics editor.

After a stint in the political wilderness, the carbon tax is ascendent again in Washington. In November, Louisiana senator Bill Cassidy introduced a carbon-tax bill, dubbed the Foreign Pollution Fee Act, which would hit imported goods. Centrist journalist Matt Yglesias wrote in October that the carbon tax “deserves to make a comeback.” Kyle Pomerleau and Shuting Pomerleau, of the American Enterprise Institute and the Niskanen Center, respectively, published a paper that same month calling for an elaborate carbon-tax-child-tax-credit swap.

Senator Cassidy’s bill can be understood as geoeconomic strategy in environmental garb. The Yglesias and Pomerleau recommendations, on the other hand, fuse limits on greenhouse gas emissions with fiscal considerations (and social policy, in the Pomerleaus’ case). None of these carbon-tax proponents is a political naif. Cassidy spurned the term “carbon tax” because it is so unpopular outside the Beltway. Yglesias acknowledges that raising taxes “is, genuinely, politically challenging.” The Pomerleaus, likewise, admit that carbon taxes face “long-standing” political headwinds.

Yet, none of these plans takes seriously another formidable obstacle to the effectiveness of a carbon tax: the cocktail of emissions policies already in place at the federal, state, and local levels.

The Pomerleaus suggest that “the existing clean energy tax breaks and regulations meant for reducing greenhouse gas emissions could be repealed.” The blackboard version of the carbon tax promises to cut emissions at costs lower than those of the regulatory approach by letting price signals encourage mitigation where it is most affordable. But political, constitutional, and economic realities make it more likely that a carbon tax would float atop three decades’ worth of energy price distortions rather than replace them.

The totality of existing policies that would need to be repealed is too extensive to document here, but a sampling will demonstrate the depth of the challenge.

The Inflation Reduction Act (IRA) provides an unprecedented level of federal support for technologies that produce low-emissions energy. These subsidies were initially projected to cost $369 billion. Repealing the 119 IRA incentive programs listed in the White House guidebook and swapping in a carbon tax might appeal to the Washington policy crowd, but the constituencies that enjoy those incentives will not give them up easily. The argument that a carbon tax will sort things out provides little solace to a firm built on IRA largesse.

The Production Tax Credit (PTC), which has applied to wind energy for decades but was expanded to all emissions-free energy in the IRA, is perhaps the most fitting example of using a wide-ranging subsidy to incentivize low-emissions energy rather than a tax to discourage carbon emissions. An analysis by the energy consultancy Wood Mackenzie (independently assessed here) shows that the PTC will pay power plant owners $2.7 trillion to $2.8 trillion before phasing out. This interest group is not likely to give up this money quietly.

Many permanent federal agencies (and offices within agencies) are dedicated to reducing greenhouse gas emissions—a mission that the carbon tax would make redundant. Perhaps the largest federal interest group that would resist a tax-for-regulations swap would be the Environmental Protection Agency itself, along with the industries that benefit from its rules. And what about restrictions on permits required for oil and natural gas exploration, production, and transportation? Advocates have been working for years to convince agencies to consider greenhouse gas emissions in their analyses of new natural gas pipelines under the National Environmental Policy Act (NEPA). If a carbon tax fully captured greenhouse gas effects, then we should be able to forego these considerations and close the book on NEPA lawsuits concerning climate damages from new infrastructure such as roads, housing developments, and pipelines.

Pruning the thicket of state and local policies would be even trickier. By one count, state and local policies contain 2,457 entries encouraging renewables and energy efficiency. All these subnational policies would have to be repealed under a national carbon tax, but doing so would pose a daunting challenge to the core of the American federal system of governance. 

Emissions have been blended into energy policies at the state and local level for decades and have shaped existing energy mixes. Many states have Renewable Portfolio Standards, for example, that require utilities to obtain a certain percentage of their electricity from non-fossil-fuel sources like wind and solar. Similarly, some states have implemented a program of Zero Emission Credits to keep current nuclear power plants in operation. Whether such policies can be preempted under federal law is a matter of legal debate, but thus far the appellate courts have decided that they are not preempted. And such policies are growing in number: Michigan, for example, just passed a law mandating that utilities provide 100-percent “clean” electricity by 2040.

According to a Brookings Institution analysis, more than 600 local governments in the United States developed climate action plans between 1991 and 2020. The same report noted that, among the 100 most populous U.S. cities, 45 have established greenhouse gas reduction targets and an additional 22 have committed to reducing emissions. Local governments have sprinkled their own ingredients into the carbon-mitigation cocktail through building codes and sustainable building certifications, public transportation funding, and bans on home installations of new fossil-fuel infrastructure like natural gas hookups.

National carbon-tax proponents argue that it would work more efficiently than the alternative of subsidizing and regulating. But repealing the policies outlined above would face severe political challenges from entrenched interest groups and public choice dynamics. Whether shaken or stirred, the carbon regulatory cocktail cannot easily be unmixed.