Price increases do not equal tax increases

Posted on June 2, 2008


Robert J. Samuelson of the Washington Post has a problem with the idea of a cap-and-trade system for reducing carbon emissions: since it increases the cost of energy, it’s a tax, not a “trade,” and so should be called a “cap-and-tax” system instead.

I have a problem with his characterization, but not because he’s wrong about how energy costs will go up with the implementation of a a cap-and-trade system, or the straightforward carbon tax he prefers. Suddenly pricing what was previously free will absolutely increase the price of energy, no matter whether the price is determined by supposed market mechanisms or by government fiat. No, what I have a problem with is that he appears to be implying that anything that increases the price of energy is a tax.

Reviewing five economic models, the Environmental Defense Fund asserts that the cuts can be achieved “without significant adverse consequences to the economy.” Fuel prices would rise, but because people would use less energy, the impact on household budgets would be modest.

From 2006 to 2030, the U.S. population will grow 22 percent (to 366 million) and the number of housing units 25 percent (to 141 million), the Energy Information Administration projects. The idea that higher fuel prices will be offset mostly by lower consumption is, at best, optimistic. The Congressional Budget Office has estimated that a 15 percent cut of emissions would raise average household energy costs by almost $1,300 a year.

OK, for the sake of argument, let’s say that the CBO’s estimates of $1,300 per year average are more accurate than the EDF’s estimates. That’s definitely a price increases, but I fail to see how it’s a tax.

Taxes are levied by governments, and the rate of the tax is determined by the government. In the case of a cap-and-trade system, the government is auctioning off (or giving away) allowances to pollute and then gradually ratcheting the total tons of permitted pollutants back over the course of years. Even if the EPA auctions off those allowances initially and thus makes money off of them, that’s no more a tax on energy than the FCC auctioning off valuable electromagnetic spectrum. And if the price of energy increases as a result of the cap-and-trade system (and, make no mistake, it will), is that any more of a tax than if the price of your wireless service goes up because some of the available wireless spectrum went unsold due to the “open-source wireless” demands of Google?

The only difference between these two situation is that everyone has to use energy to survive, while wireless access is not a necessity of survival, no matter that your teenager might think otherwise. The atmosphere is a vital national “commons” just like electromagnetic spectrum is, and so it falls under the purview of the government to regulate it. But unless you’re a hard-core libertarian, regulations themselves are not equivalent to taxes. A cost of doing business that adds to the price of things, certainly, but that’s not fundamentally a tax.

If we look at Samuelson’s suggestion from the “energy price increases are a tax” side, what he’s really suggesting is that any time the price of something that is vital for survival increases, that’s a tax. So when energy price increases drive up the price of fertilizer and thus the price of food, that’s an increase in the tax on food. The rising cost of electricity from your local regulated utility because China’s demand for U.S. coal is driving up local coal prices also qualifies as a tax. And the increasing price of gasoline qualifies too. But if the price of food goes up because of drought, floods, or other supply disruptions, isn’t that a tax too? I mean, the price rose, didn’t it? And if the price of electricity rises because local growth has pushed demand enough to require your utility to build a new power plant, that’s a tax too, right? The price per kilowatt-hour went up, after all…. And when the price of gasoline goes up in the winter due to heating oil demand and up in the summer due to the summer vacation driving season, those are tax increases as well, right?

Great! That means I get a twice-yearly tax cut when the price of oil drops in the spring and autumn as a result of lower demand for heating oil and fewer people driving long distances. Whew, I was all worried there for a second that it was all tax increases, no tax cuts. And please, let me know which of my Representatives or Senators I should contact to demand that God lower the drought and flood taxes on food….

Taxes exist to make governments operating capital in order for them to provide the services that commercial ventures, industry, and individuals are incapable of providing themselves. Anything that doesn’t qualify as funds acquired for the operation of a government simply are not taxes, even if the government makes money off them (as in the aforementioned FCC auction). When the government finally gets around to regulating carbon emissions in some fashion, the resulting increases in energy prices will not be taxes.

The price increases that are coming as a result of carbon reductions may well be taxing, but that does not make them taxes.

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