Innovation Needs to Be Part of Carbon Tax Debate

Last week, representatives of an array of think tanks and advocacy organizations from across the political spectrum gathered at the American Enterprise Institute (AEI) to discuss the feasibility of enacting a national carbon tax. It was the fifth such closed door-meeting. It might surprise people to learn that there is common ground between some conservatives and liberals on the idea of a carbon tax. However, even if a narrow patch of common ground yields a solid policy consensus, innovation must be part of the carbon tax debate.

To be sure, some activists on the Right have been highly critical of the group’s efforts, the participation of free market-oriented groups like AEI and the R Street Institute notwithstanding. In a post to a conservative listserv – in which he also leaks a copy of the meeting agenda – the Competitive Enterprise Institute’s Myron Ebell declares, “We must kill this incredibly harmful idea as quickly as possible.”  “A carbon tax is not a conservative, free-market policy,” Nicolas Loris writes at the Heritage Foundation’s blog. And yet a carbon tax has a surprising number of conservative supporters and could boost national energy innovation – if structured properly.

Many Democratic policymakers have come out in support of a carbon tax, but support exists on the Right as well. In addition to the AEI gathering, last week saw the launching of the Energy and Enterprise Initiative, an organization dedicated to providing a platform for conservative ideas to address climate change – including a carbon tax. In fact, its leader, former Republican congressman Bob Inglis, penned an editorial with Reagan economic advisor Arthur Laffer – of Laffer curve fame – several years ago in favor a carbon tax that is fully offset by a reduction in other taxes. Other examples of conservative supporters of a carbon tax include Republican statesman George Schultz, who called for such a tax to control for energy’s negative externalities, and former Republican congressmen Sherwood Boehlert and Wayne Gilchrest, who came out in support in a Washington Post editorial earlier this year.

Given support on both the Left and Right, a carbon tax is clearly not a radical idea – but is it a good one? This issue is addressed in detail in the ITIF report An Innovation Carbon Price: Spurring Clean Energy Innovation While Advancing U.S. Competitiveness. The report notes that a carbon tax would harm U.S. industrial competitiveness and, given political constraints, “would never be high enough to induce the creation of affordable and accessible clean energy technology (and thus reduce CO2 emissions).” In other words, we’d both undermine our competitiveness and fall short of spurring the innovation of the new technologies essential in making clean energy competitive with fossil fuels.

In that vein, the ITIF report goes on to propose an “innovation carbon price” in lieu of a simple tax on carbon that could both reduce carbon emissions and boost economic competitiveness by encouraging innovation. An innovation carbon price would accomplish those goals by recycling revenues back into the economy in the form of a variety of growth and innovation-inducing business tax incentives and through the funding of a Clean Energy Innovation Trust Fund that would support clean energy innovation initiatives.

Of course, a bipartisan deal on a carbon tax is very premature. One participant of the AEI gathering, David Jenkins of ConservAmerica, characterized it as “a very casual, informal meeting…It’s all so preliminary and hypothetical and just basically brainstorming.” Republican congressional leaders have already signaled their opposition. Nevertheless, given the scope of the climate and energy challenges facing the nation, it is good to hear that thoughtful policy debate and discussion continues. “AEI has been and will continue to be, an intellectually curious place,” the think tank responded to critics of the gathering in a statement, “where products aren’t influenced by interested parties, and ideas from all are welcome in seeking solutions for difficult public policy problems.” If a carbon tax is to be a serious policy proposal, however, spurring innovation must be part of the debate. ITIF’s idea of a carbon price would be a good starting point.