As a result of my post the other day on the carbon tax proposal by Congressman Inglis and Arthur Laffer, I received a call from Congressman Inglis' office, inviting the media, which to my surprise apparently includes me, to join a conference call hosted by Inglis and Laffer, where they would talk about their proposal and take questions. I had never done one of these before and it sounded like fun, so I joined in.
My question for them was, how exactly would they structure this carbon tax? In my view, the structure is key for making such a tax consistent with trade rules, so I was curious to see what they had in mind.
Dr. Laffer was thinking of a pure gas tax. If this just means increasing the rate of the current federal gax tax, such a measure is, in my view, unlikely to be a problem under WTO rules.
By contrast, Congressman Inglis wanted a dual approach -- a gas tax to keep gas above $3 or so per gallon, as well as a carbon tax of some sort. The Congressman has prepared a document which elaborates a bit on both aspects (it's not linkable for now, but it should be on his web site soon). He explains that there will be a "price" on carbon (if I understand correctly, either through a direct tax or through a cap-and-trade program). In addition, the tax "would apply to fossil fuels as they enter the economy: at the mine mouth, the oil refinery and the natural gas pipeline." Then, to prevent carbon leakage, there will be a border tax applied to imports: "In order to accord similar tax treatments to domestic and imported goods, products imported from countries without carbon constraints would be subjected to the U.S. carbon tax. The tax would be applied at the U.S. port of entry."
I worry about this approach. It seems to me it would be difficult to set this up in a way that treats imports and domestic products equally, not to mention treating imports from different countries equally. Just trying to do the calculations so that everyone is equal is hard enough, but then when you have domestic industry lobbying on the issue as well, the task may be too much.
At the risk of being too bold and weighing in on issues I don't know enough about, I thought I might offer a suggestion for how I think a carbon tax might be designed so as to reduce carbon emissions in a way that does not violate trade rules. Mind you, this will be a very brief description, leaving out a A LOT of important details (it's just a blog post, after all). And it no doubt ignores many political realities. But maybe it can provide a useful framework (or at least an interesting discussion). So, without further ado, here's my two-step proposal.
Step 1 would be to require labeling of all products sold in the United States to indicate the carbon emissions that result from their production and distribution. (Other countries have already suggested doing this, for some products at least.) There would be as little differentiation between imported and domestic products as possible here. There may be a couple implementation areas for which you would need different rules, but for the most part it would just be a labeling requirement that applies to all products.
Once Step 1 has been successfully implemented (which could take a little while, I admit), you could then move to Step 2, which is to impose taxes on these goods in relation to their carbon content. If Step 1 goes well, Step 2 really won't be that difficult. It's just a question of setting the appropriate tax rates.
There is no getting around the fact that this will be enormously complicated to set up. But is it any more difficult than the alternatives? Cap-and-trade sounds much harder to me.
And in terms of trade concerns, I think this approach would be much less of a problem than the alternatives.
Any thoughts? What are the advantages and disadvantages of this idea as compared to the alternatives?
