In a June 12 blog post titled “A Carbon Tax and the Clean Power Plan Would Work Together to Cut Greenhouse Gas Emissions,” the Center for American Progress (CAP) argued that if Congress were to enact a carbon tax, it should not repeal the Clean Power Plan (CPP) because “the Clean Power Plan and a potential carbon tax are mutually reinforcing rather than mutually exclusive.” In fact, “the Clean Power Plan would actually reduce the economic burden of any potential carbon tax on the power sector” because, they contend, “the more that power plants increase their efficiency and lower emissions under the Clean Power Plan, the lighter the burden of the carbon tax.”
Well, that is correct, but in the same way that it might be correct to say “foreclosure is a great deal, because then you don’t have to make any more mortgage payments.”
Two issues loom here, neither of which CAP bothered to mention. First, by definition, a carbon tax would reduce emissions beyond what the CPP requires only if the marginal costs of eliminating the remaining CO2 were lower than the tax. As we have previously written, a ballpark figure for the marginal cost of CPP reductions is about $27/ton. Thus (because Congress only deals in round numbers), only a tax starting at $30/ton or more would get any additional reductions.
Second, and far more important, is that even while CAP concedes that a carbon tax would reduce emissions beyond the CPP requirements (in fact, its entire post is predicated on this idea), then by definition the tax would have also eliminated all the emissions required by the CPP. Power plants will employ the cheapest means of getting the required CPP reductions; if the cost of further reductions is less than the tax, then the cost of the CPP reductions had to be even less than those additional ones. Thus emissions eliminated by the CPP would also be eliminated by the tax. Basic economics seems not to have played any part in CAP’s thinking.
Nor is CAP’s ignorance confined to economics. CAP gives two historical examples of why both regulatory mandates and a tax justify imposing a carbon tax on top of the CPP. The first is the measures employed to reduce ozone-depleting substances (ODS). Noting that after signing the Montreal Protocol, the U.S. imposed both a cap and a tax on ODS, CAP then quotes a 1996 World Resources Institute study:
Clearly, the combination has been extremely effective, and there is some reason to believe that the tax on ozone-depleting chemicals lowered production more than regulatory caps alone would have. In 1990, the year the tax was imposed, total CFC consumption dropped to 440 million pounds down from 700 million pounds in 1989.
Fine as far as it goes, but CAP does not include the very next sentence from the WRI study: “Indeed, from 1990 through 1993, consumption was consistently less than 65 percent of the allowable level.” In other words, just as would happen if there were both regulatory mandates and a tax on power plants, the ODS cap was entirely meaningless because—on its own—the tax achieved all of the mandated emissions reductions plus a significant amount more.
CAP’s second example of why regulatory mandates and taxation are “complimentary” policies is tailpipe emission standards. CAP argues that such regulations are necessary because the demand for gasoline is largely inelastic in that demand for gasoline does not decrease when the price of gas goes up. That is correct, but less than half the story. More importantly, gasoline taxes do not send a price signal to car buyers: a $30/ton carbon tax means that gasoline prices would rise by $.30/gallon and, much like it is too small to change driving habits, it has a near-zero impact on moving purchasers toward more fuel-efficient vehicles.
Apropos of price signals, we thus come to why the example of tailpipe CO2 emissions standards is irrelevant to power plants. A $30/ton carbon tax would not change vehicle emissions, but it would have an enormous impact on power plant emissions as the marginal costs of coal-fired power would go from the lowest to among the highest, and thus would get bumped correspondingly further down (and out of) the dispatch order.
Embracing emissions regulations on top of an otherwise binding carbon tax simply dictates to the market how emissions reductions are to be achieved; it does not produce additional increments of emission reductions. It thus defeats one of the primary virtues of the tax; encouraging the most cost-effective mitigation investments possible. Environmentalists do themselves no favors embracing regulatory regimes that make their policy ambitions more costly than necessary.
 CAP also concludes that “the regulatory caps prevented the tax from becoming ‘another cost of business to be passed on to purchasers,’ forcing a market shift toward alternative chemicals.” We would be very interested in understanding how a regulatory cap would prevent a manufacturer from passing on the costs of either complying with a cap or paying a tax, but we suspect CAP has no idea either.