The Obama administration environmental agenda reemerged on Thursday with the announcement of additional restrictions on strip mining, new fuel efficiency standards for cars, and expanded offshore drilling. These measures may have some merit, but a solution to America’s energy problems will require more comprehensive reform that reduces carbon emissions, eliminates dependence on foreign energy, minimizes economic impact, and is politically feasible. The only plan that satisfies all of these criteria is a revenue-neutral carbon tax, and it is this strategy, instead of cap and trade, that the President should propose.
President Obama has proposed a plan, which the House approved as the Waxman-Markey bill in June of last year, to limit overall carbon emissions through a system of cap and trade. As I have noted in the Harvard Salient, the ability of this proposal to reduce emissions is suspect due to its enormous scope for evasion and dubious allowance of “offsets.” To the extent that the bill would cut emissions, it would do so very inefficiently: enforcement of the program would entail tremendous administrative costs, firms would have an incentive to compete for permits—85 percent of which will be given away for free—rather than become more efficient, and higher energy prices would redistribute wealth from households and small businesses to politically connected companies that receive permits. Fortunately, the Senate seems unlikely to approve Waxman-Markey.
And for good reason. Democrats are already in trouble for passing health care reform, and supporting the much-decried “tax and trade” bill will not help matters. Additionally, the environment is a relatively low priority on the public agenda. In a March 12 Gallup poll more than half of respondents answered that the greatest problem facing the country today is either “unemployment” or the “economy in general,” and the environment did not even rank among the top six voter concerns reported on Gallup’s Website.
The first step for the President to enact meaningful environmental reform, therefore, is to frame the issue in terms of the economy, which he can do by emphasizing our energy dependence rather than climate change. The Energy Information Administration reports that the United States imported just under six million barrels of oil a day from OPEC last year, which amounts to an enormous transfer of wealth to countries that, to quote Sen. John McCain, “don’t like us very much.” Restoring the long-run health of the U.S. economy, Mr. Obama should argue, will require that we shift to an economy powered by an expanded U.S. energy sector.
Since eliminating dependence on foreign oil requires increasing domestic supply, the first thing the President should do is radically expand domestic oil drilling. His move to open part of the Atlantic coast was a good start, but the entire Pacific coast, the west slope of Alaska, and the ANWR region remain off-limits. Drilling should be permitted in these and other areas to maximize domestic output.
To reduce emissions, the President should propose an excise tax on fossil fuels, which oil companies would pay upon extracting oil from the ground, as well as an equal (or greater) tariff on fossil fuel imports. This carbon tax could be gradually increased over time, thereby encouraging development of clean energy alternatives by making fossil fuels more expensive. Note that a carbon tax would be far simpler and less costly to administer, and would entail far less opportunity for evasion and political finagling, than the cap-and-trade plan.
Having implemented a strategy to reduce both energy dependence and carbon emissions in the long run, the President could further help the economy by making the carbon tax revenue-neutral: any revenue derived from the excise tax on domestic fossil fuel production and the tariff on imported fossil fuels would be returned to the people through a cut in the income tax.
The beauty of this revenue-neutral carbon tax is that it is politically feasible. The proposal includes two perennial Republican priorities—an income tax cut and expanded oil drilling—while reducing America’s dependence on rogue oil exporters. Democrats might prefer cap and trade, but it is difficult to imagine that they would pass up the opportunity to enact the first-ever comprehensive attempt to curtail carbon emissions. President Obama thus has a remarkable opportunity to save the environment, eliminate America’s energy dependence, and improve the long-run economy all at the same time. We can only hope he will recognize it.
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