Energy & Environment

Carbon taxes are finally poised to become a reality

ExxonMobil's announcement last week that it would contribute $1 million to Americans for Carbon Dividends puts it officially behind a lobbying campaign for a carbon tax in the United States.

Conservatives and environmentalists will both greet this with skepticism - albeit for very different reasons - and seasoned observers might see it as a pittance against the fortunes spent by opponents of a carbon tax. But make no mistake, it is an important step in the politics of climate change.

There is an astounding consensus amongst economists that a carbon tax is the most efficient way for governments to respond to the risks posed by greenhouse gas emissions. That consensus has been accepted by the business community, and even Exxon has notionally supported a carbon tax for years. 

Yet, advocacy for carbon taxes in Washington is more assumed than practiced. Many environmentalists and activists would rather throw their weight behind subsidy programs for low-carbon energy or regulations like those advanced by the Obama administration. Or, they stir anti-industry sentiments to try to halt production of fossil fuels as part of the "keep it in the ground" movement.

Meanwhile, the natural supporters of market-based climate policy - Republicans and conservatives - have been missing in legislative action on the issue for nearly a decade. Activating Republicans is exactly what climate advocates need to do. And with Big Oil now on their side - especially with a major company like Exxon funding lobbying efforts - they just might succeed. The industry has a traditional place in the Republican coalition, deep pockets, and significant political influence. 

Despite that industry support, many conservative opponents of carbon taxation will dismiss it as yet another tax on an industry that pays enough already. Fossil companies pay taxes when they produce fossil fuels and when they sell them. Consumers pay energy taxes on gasoline. So why would Big Oil back a big new tax on its own business?

The logic is, in fact, relatively simple.

Big Oil is behind a carbon tax because it is an incentive to change the business model, not eliminate it altogether. Part of the economic case for a carbon tax is that price increases promote efficient use of high-carbon resources in the near term. But in the long term, they promote changing business models. And if we really want to act on climate, Big Oil is going to need some different business models. 

Take the newest report from the International Panel on Climate Change (IPCC). It says that the share of low-carbon energy that we use to power transportation will need to rise from about 5 percent today to 25 percent to 45 percent in 2050 to keep global warming to 2 degrees Centigrade.

Switching to fuels that emit less carbon could help clean up trucking, flying, and shipping, implying a huge market opportunity for high-tech, low-carbon, fuels. A carbon tax would align that need with Big Oil's desire for increased market share and profit, inspiring cross-firm competition and long-term innovation.

Plus, carbon pricing could become a motivating factor for the development of technologies to capture carbon from the air and store it away. The IPCC report is clear that to maintain a safe climate, such technology will be necessary in a few decades at industrial scales. That will be an enormous industry unto itself, and one where competitive advantage will go to companies specializing in chemical engineering and geology.

For environmentalists, Big Oil, and Exxon in particular, are viewed as bad actors. Exxon has, in fact, historically sided with the anti-carbon tax faction (with excuses ranging from the fear of costs to disbelief in the science). This new move, therefore, will be interpreted as a cynical ploy to absolve the company of previous sins, escape painful regulations, lock in low-climate ambition, and greenwash the company back into good corporate standing. Some of that may be true. But good intentions should not be a prerequisite to good policy.

This announcement comes at a critical time. With a conservative majority on the Supreme Court, the expansive regulatory authorities that have defined environmental reforms for decades will encounter new skepticism. Judicial deference for wide-reaching regulatory approaches that invest lots of power to government agencies to command-and-control the economy toward cleanliness cannot be expected. Rather than relying on the tools of the past, new approaches - and new bedfellows - will be essential to achieving environmental reforms going forward.

Joseph Majkut is the director of climate policy at the Niskanen Center

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