Senate Democrats’ New Plan to Tax Our Leading Energy Resources

Senate Democrats are proposing to institute a new tax on the use of our leading energy resources—oil, natural gas, and coal—according a leaked list of reconciliation bill pay-for options.

Before getting into the specifics of what the leaked list calls “carbon pricing,” let’s reiterate how central these fuels are to our productivity and well-being.

In terms of primary energy consumption, oil, natural gas, and coal contribute 35, 34, and 10 percent of U.S. energy on a Btu basis respectively. At a combined 79 percent of our mix, fossil energy is indispensable to our prosperity, as it is throughout the world. As it so happens, the U.S. uses fossil fuels at a slightly lower clip than the world as a whole, for which the fuels make up 85 percent of the mix

This reconciliation bill proposal would put a carbon tax on the use of these key energy resources to raise money for our seemingly endless array of new expenditures.

According to the Democrats’ Senate Finance Committee document floating around Washington, the “major options” for doing so are as follows:

1) a per-ton tax on carbon dioxide content of leading fossil fuels (e.g., coal, oil, natural gas) upon extraction, starting at $15 per ton and escalating over time, 

2) a tax per ton of carbon dioxide emissions assessed on major industrial emitters (e.g., steel, cement, chemicals), and 

3) a per-barrel tax on crude oil. 

Each option would be paired with rebates or other direct relief for low-income taxpayers, as well as a border adjustment to ensure foreign companies also pay the tax.

At this stage the outline is sparce, but as is inherent to carbon tax implementation, every option above would result in higher energy costs for American families and businesses. A carbon tax will drive up costs for transportation, electricity, industry, commercial activity, and everything else that relies upon oil, natural gas, or coal to deliver goods or services. Again, those fuels contribute 79 percent of our energy.

To put this into everyday terms, a 15-dollar tax on oil translates loosely to a 15-cent increase in the price of gasoline per gallon.  

This would come at a time when Americans are already reeling from this summer’s price sting and, ironically, just after President Biden’s national security adviser pleaded with OPEC and Russia to put more oil onto the market. Of course, there’s nothing new about the Democratic Party bemoaning increases in the most visible consumer price in our economy while simultaneously seeking to drive it higher with coercive policies.

It should also be stressed that while some carbon tax plans are framed as revenue-neutral—for example, by pairing a carbon tax with a reduction in corporate taxes—each of these options is an explicit revenue-raiser that would contribute to new spending.

The document also contains an admission of the carbon tax’s biggest weakness from the perspective of progressive politics. Carbon taxes are what we in the policy world call regressive. They hurt those at the bottom of the household income charts the most as a percentage of their budgets, because certain energy expenses are simply unavoidable no matter how tight you pull the belt.

In an effort to counterbalance the carbon tax’s regressive nature, the document mentions “rebates.” This is a euphemism for checks sent from the government in order to offset the inevitable increase in energy expenditures. We do not know who would be included in the rebate plan or how much would be redistributed.

What we do know is that this approach to carbon tax revenue recycling is among the least efficient.

IER has published extensively on this matter, most notably with the 2018 paper The Carbon Tax: An Analysis of Six Potential Scenarios.

The paper found:

A tax swap that recycles 75% of gross revenue by returning it to taxpayers as a lump-sum rebate results in persistent economic underperformance over the entire 22-year forecast period. GDP is reduced by between as much as 1.07% and 1.67% relative to the reference case at the beginning of the forecast period, depending on the amount of tax, and gradual.

In January I covered this topic in an IER blog post, where I cited studies from both the Tax Foundation and EY.

Here’s what I wrote in January:

The Tax Foundation study finds that the rebate strategy reduces regressivity but is harmful to overall economic output and harmful to employment. A payroll tax cut strategy, meanwhile, yields output and employment boosts, while also making the tax code slightly less regressive.

The EY study, similarly, reports that both a permanent extension of select Tax Cuts and Jobs Act provisions and investment in public infrastructure would outperform household rebates as carbon tax revenue uses. In the rebate scenario the entirety of the long-run positive change in annual per-household GDP would be attributable to the removal of the existing regulatory approach. In the EY analysis (figure ES-1) the rebate itself would cause losses of 0.4 percent, but be offset by gains of 1.1 percent as a result of ditching regulations.

While it may be the case that some carbon tax revenue strategies could mitigate the tax’s regressivity, the literature does not support a lump-sum rebate strategy.

The rebate approach would put drag on our economic performance.

The document’s other admission is that we’d need to erect new trade barriers to prevent businesses from fleeing to lower-cost environments. The document calls this a border adjustment.

In July I analyzed carbon border taxes at the American Spectator, where I wrote:

Democrats will try to sell this new tax as a way to save American jobs, but as has long been understood, tariffs deliver concentrated economic benefits to the powerful incumbents who lobby for them while spreading new costs across the wider population. Far from being an economically just approach, the carbon border tax would further enrich existing companies while taxing American households.

IER economist David Kreutzer spoke on this topic recently as well. His interview with Forbes is worth listening to in full, but here’s what he had to say about carbon border taxes:

Yeah, that maybe is the most compelling sounding part of this thing. But it is, I think, the most dangerous.

It is a constant battle to keep people that want tariffs and other trade restrictions at bay. There are always special interests that want to protect whatever their industry is or whatever their product is. It’s an almost impossible task for economists to keep that as low as possible.

This carbon border adjustment would be very, very difficult to set up. I mean, you’d have to know, for instance, if you’re bringing in a car from Japan, how much of a carbon tax did they have in Japan? Did they import something from Korea where they had a different carbon tax? Did they use steel from some other country? What’s the carbon content that hasn’t been taxed and all of these products that are coming in?

There are going to be lobbyists who are going to go out and say, “Our competitors’ imports actually have more carbon than they claim.” There are going to be lawsuits. There’s going to be all sorts of rent-seeking and lobbying going on.

Once you get that in place, I think that would be the most difficult thing to unwind. It’s very, very difficult to get rid of tariffs because of what we call the special interests effect. The benefits are narrowly focused and the costs are spread out so there’s not much organized opposition to them. 

I think that the carbon border adjustment tax — that tariff — is the scariest of the proposals that they’ve put out.

The Senate Democrats’ leaked carbon tax plan bodes poorly for American energy affordability and economic productivity.

Speak Your Mind


Anonymous says:
Your email has been received. Thank you for signing up.