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An Economy Improves By Building Markets, Not Imposing Taxes

An Economy Improves By Building Markets, Not Imposing Taxes

By Drew Bond

When a government wants less of something, it increases taxes on that thing. That’s why cigarettes cost more than $13 per pack in New York City.

That principle makes sense, in a way. Governments are skilled at raising taxes. That’s how they get their funding and how they maintain their power. Sometimes the approach actually works. As we know, fewer people smoke now. That’s due, at least in part, to the fact that cigarettes are so much more expensive than they were decades ago.

The problem is that governments don’t have many tools other than the tax code. Taxes are a hammer, so to governments every problem looks like a nail. Eventually, even the best hammers wear out, though. For example, many people still smoke, and some will no matter how much it costs. Raising taxes can only eliminate so much of that problem, or any problem, no matter how high tax rates go.

That’s worth keeping in mind now that governments around the globe insist they are going to work together to reduce the amount of carbon dioxide in the atmosphere.

Increasingly, governments are looking for a hammer when it comes to reducing carbon emissions. Even large corporations are starting to call for the government to have such a hammer. They call it different things – A “price.” A “market-mechanism.” A “clear price signal.” But these all mean the same thing: a hammer. What they mean is a tax.  

Ultimately the challenge of any “clear price signal” (aka “tax”) on carbon is that it will need to grow and grow and grow if it is to be effective. The approach may work for a short time, but will quickly become less effective and more costly. And even if governments add the carrot of a rebate back to taxpayers, as some are suggesting, that’s nothing other than a gimmick to try and placate small businesses and consumers who will ultimately pay the price. 

To succeed at reducing carbon, we need to move beyond taxes.

As the Business Roundtable notes, “the existing patchwork of federal and state regulations, tax incentives, subsidies and other policies is inefficient and has negatively impacted the long-term investment strategies of many U.S. companies by creating regulatory uncertainty.”

It would prefer “a well-designed market-based mechanism and other supporting policies to provide certainty and unleash innovation to lift America toward a cleaner, brighter future.” The question is how to get that. If the Roundtable supports a “market-based mechanism” that is actually a “tax,” it would eventually fail.

A better approach would use the power of markets to reduce carbon. Unleash free-market competition by reducing regulatory barriers, streamlining and accelerating permitting for clean energy, and getting rid of all energy subsidies.  Let all forms of energy compete on their merits. Consumers are already demanding cleaner energy sources. The government should support consumer demand by investing in energy innovation and then get out of the way.

The scale of the environmental challenge demands that we continue developing and improving on a range of low-carbon options, not just one or two technologies. Environmental and energy experts agree that without a diversity of options it will be much more difficult, if not impossible in economic and in practical terms, to meet rising world demand for electricity while substantially reducing global carbon emissions.

The question is how to get there. We get there with innovation.

“We’re short about two dozen great innovations. How do we improve how we make steel? Or cement? Not easy problems,” as Bill Gates told Bloomberg in an interview about international problems such as carbon proliferation. He adds that creating markets can deliver solutions. “If you back 20 or 30 approaches to each of these problems, your chance of success is actually pretty high, particularly if you build an initial market and become a totally price-competitive product, like car batteries or solar panels.”

Thus, an expansive view of energy innovation and competition, grounded in a clear-eyed understanding of the needs of the modern electricity grid and of the distinct characteristics of different generation technologies, will produce not only greater environmental benefits, but also a more resilient, reliable and affordable electricity system. It will also deliver new ways to reduce carbon without a tax.

Policymakers should put their hammers down, and start working to stand markets up. That will allow us to address climate problems without wrecking our economy.

Copyright © 2020 Conservative Coalition for Climate Solutions

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