Carbon Tax: Simple Solutions

Although the health care debate has sucked nearly every ounce of air out of other policy debates, it's important for Americans to remember another piece of legislation being pushed by the Obama administration: cap and trade. The House narrowly passed a bloated, 1,000-plus-page behemoth loaded with corporate welfare, pork, and perverse incentives (making it more than a little like the stimulus bill, in that respect). The Senate has yet to act on the bill, and there are doubts it can make it through, even with the Democrats holding a filibuster-proof majority in the upper chamber.

Still, the environmental movement is tenacious, an amalgam of passionate activists, respected intellectuals, and opportunistic business interests. The right and the center are deluding themselves if they believe the defeat of the current cap-and-trade proposal will preclude eventual government action to combat global warming. The greens have plenty of pet issues, but they have an almost religious devotion to stopping global warming.

So we have a proposal to offer them. First, forget about the House bill. That plan would significantly damage economic growth while simultaneously having a minimal effect on carbon emissions. Second, gradually implement a carbon tax, eventually settling on a very high level. This, more than the cap-and-trade scheme, would be a transparent way to set up an incentive structure that will deter consumption of fossil fuels and encourage other forms of energy.

The next step is the most important one: While the carbon tax goes up, there must be, at the very minimum, a commensurate reduction in payroll taxes. Preferably, they would be cut more than the carbon tax would be increased, making the plan a net tax cut. The result would be an increase in the tax on fuel consumption and a decrease in the tax on labor. The payroll tax is a regressive levy on employment that discourages job creation and depresses wages. Almost any other tax would be better.

Finally, the current tangle of half-hearted energy policies should be taken off the books. This means repealing the CAFE standards, eliminating subsidies and tax breaks for all forms of energy, and striking down mandates -- for ethanol, renewables, and so on. These policies would be rendered useless by a transparent carbon tax that provided incentives for consumers to buy more fuel-efficient cars, for entrepreneurs to invest in renewable energy start-ups, and for companies to cut costs by finding new sources of energy. This is an approach that could truly reduce carbon emissions without having an adverse impact on the economy, while also dealing a blow to the energy, farm, and environmental protection bureaucracies.

So we challenge the greens: Are you game?