The nightmare of taxing carbon dioxide

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A lot has been written about the proposed carbon dioxide tax bill introduced in the US House by republican Representative Carlos Curbelo. Many writers have pointed out that it is expensive, pointless and has no chance of passage in the present Congress. It is an election year gimmick at best.

But it is also worth looking at more deeply since it exemplifies why so-called “carbon taxes” are unworkable. The Bill is an administrative nightmare. This is because fossil fuels are central to our lives.

The Bill is over 70 pages long, with several distinct sections. Each of these addresses a fundamental problem with the idea of taxing carbon dioxide emissions.

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To begin with, the Bill does not tax emissions, even though that is the language it uses. It can’t because emissions are innumerable and everywhere. Most homes and almost every car emit carbon dioxide. So do countless other sources, from airplanes to lawn mowers, home heating to barbecues.

So the Bill taxes the production of hydrocarbons instead. Exactly where this happens in the production process varies, which is already a complication. It also taxes imported hydrocarbons, sometimes at the point of entry, but not always. Oil and natural gas come into the country in complex ways. It also taxes other stuff.

These taxes are thus collected from many places, in many ways. This is done by the IRS, which has no expertise in such matters, so maybe the IRS will add a new wing on to do it. This will no doubt create a lot of jobs.

The total cost of this Bill is estimated to be upwards of a trillion dollars, which is a lot of taxes. After all, it is specifically designed to drive up the cost of carbon based energy, which is most of the energy we use in America.

Here the huge problem is that a lot of hydrocarbons are not burned, so they create no emissions. They are used in myriad ways, including as process chemicals, for plastics and drugs, for lubrication, etc.

The Bill’s answer to this is a hugely elaborate exemption system, also to be administered by the IRS, which knows nothing about this stuff. Here is the exact language in the Bill (the Secretary being the Secretary of the Treasury, but the IRS actually does the job):

(A) REFUND FOR REDUCTION OR ELIMINATION OF EMISSIONS. Any manufacturer of a product that incorporates a fossil fuel that has been taxed under this section who can demonstrate to the Secretary that the fossil fuel has been transformed via the manufacture of the product so that the fossil fuel’s emissions will be reduced or eliminated over the product’s lifetime shall be entitled to a refund of the tax paid under this section on the proportion of the emissions reduced thereby, as determined by the Secretary.”

So the producer of the fossil fuels does not get the rebate. That goes to the manufacturer of the product that uses the hydrocarbons in any way that reduces, or does not involve, emissions. The number of such uses is legion. Note too that the manufacturer has to know how much tax the producer paid, but the tax rate changes every year by law. This is an incredibly complex mess.

The other sections are too complex to go into, but here is a quick summary.

There is a border tax “adjustment” to counter “leakage” (I am not making this up). Leakage is jargon for the loss of manufacturing to other countries because of the tax. These folks do not car about the loss of jobs, just that the emissions do not go down.

So the IRS is supposed to somehow determine whenever the U.S. carbon dioxide tax has caused emissions to increase in some other country because they are now making something we would have made and selling it to us. In that case the imported product is taxed as though it were made here (not that our manufacturers pay the taxes directly) and if we export a similar product, its manufacturer gets a rebate.

If this sounds nuts, here is the language: “(2) BORDER TAX ADJUSTMENT. The term ‘border tax adjustment’ means the levying of a tax on imported covered goods equivalent to the amount of tax paid pursuant to part 1 of this subtitle in the manufacture of comparable domestic manufactured goods, and the rebating of the tax paid pursuant to part 1 of this subtitle that has been paid on covered goods exported from the United States.

No doubt this boondoggle will immediately generate a carbon based trade war, with every major country taxing the others supposed leakage.

Then there is the green pork barrel. After all, we here have many billions of tax dollars to spend. Some of this goes replaces the gasoline tax, which is repealed, but that is not new money. A lot of the new money is directed into a host of green programs. About a third of it is unaccounted for in the Bill so maybe it will be up to Congress to spend it. That should make the Bill pretty popular on the Hill. No doubt the IRS will get a lot for the new wing it will need to process all these goofy transactions.

There is also some attempt to alleviate what is called “energy poverty,” which carbon dioxide taxes typically create. The issue is that in general the poorer you are, the greater the percentage of your income that you spend on energy. We can do without a lot of things but energy is not one of them. Once again we find an elaborate rebate system, which only helps a small fraction of those adversely affected.

In summary, this bill creates a wildly elaborate system, for no real purpose except to respond to climate change alarmism. Hydrocarbons are fundamental to our lives. Trying to social engineer their use is a very bad plan.

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