Carbon Taxes:
Reduce global warming or raise revenue?
19 May 2010 in Regulatory Economics
Previously we have blogged on so-called Pigouvian taxes as policy remedies for addressing climate change, noting how they often degenerate into schemes for raising revenue rather than equalizing private and social cost. Today's news brings another example.
"Montgomery County [MD] Council members are poised to pass a carbon tax to fight global warming that would apply only to the county's largest emitter of greenhouse gases," according to Washington Examiner staff writer Brian Hughes. The proposal is described as a way to "showcase[] leadership in reducing the area's carbon footprint," but the sponsor of the measure acknowledges that its real purpose is more mundane: to raise $15 million in tax revenue. The county is said to face a $1 billion deficit in its $4.3 billion budget.
Hughes reports that Mirant Corp., the owner of the Dickerson Generating Plant (DGS), would be the sole entity subject to the tax because entities generating less than 1 million tons of carbon dioxide would be exempt. Mirant officials say "the tax will raise electricity prices in the county and lead to a surge of power from out-of-state producers not bound by the county's stringent environmental regulations." Hughes quotes DGS' director of external affairs Misty Allen saying, "An increase in our price to produce will likely result in the electricity market not calling on our station."
If Mirant can pass on the tax to its customers, then who pays the tax depends on who buys electricity from DGS. Montgomery County electricity prices would rise only if its residents were compelled to purchase power from DGS and state public utility regulators agreed to allow a rate hike to cover the tax, which seems unlikely.
Meanwhile, the wholesale electricity market is competitive. PEPCO is the utility serving Montgomery County, and unless it is contractually bound to do so, it will not pay DGS a higher price just because Montgomery County has levied a carbon tax. And no other retail supplier of electricity will do so, either. That means Mirant shareholders would primarily bear the tax; financial capital may be mobile, but physical capital (such as a steam generating station) is not. (This tax on physical capital would be offset somewhat by lower income tax payments to Maryland and the federal government. Some of the tax burden thus would be shifted to Maryland and federal taxpayers.)
A surge of power from "out-of-state producers not bound by the county's stringent environmental regulations" could occur, and if it did, the true carbon footprint of Montgomery County residents would increase, not decrease as proponents say they intend. But this would happen only if total sales from DGS decline. That could only happen if Mirant responds to the tax by reducing output at DGS. Indeed, only if Mirant reduces electricity output from DGS will the tax reduce carbon dioxide emissions, as proponents say they intend. If output does not decline, then Montgomery County's "carbon tax" is not a Pigouvian pollution tax. It's indistinguishable from a head tax -- in this case, one levied on a legal person rather than a physical one.
The US Constitution forbids Congress from levying head taxes that are not borne proportionately:
No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.
The States and their local government subdivisions are covered by this language via the 14th Amendment's equal protection clause. We will research the question whether a local government tax levied on a single entity is sufficiently akin to a head tax as to be unconstitutional.
