By Vance Ginn

The push for a carbon tax has regained popularity as the fiscal storm in 2025 and climate change debates intensify. Advocates claim it’s a solution to pay for spending excesses while reducing greenhouse gas (GHG) emissions. But a carbon tax is a misguided, costly policy that must be rejected.

A carbon tax functions more like an income tax than a consumption tax, capturing all forms of work, including capital goods production and building construction. These sectors are heavy on carbon emissions, meaning the tax disproportionately burdens them, stifling investment and innovation — much like a progressive income tax, but with broader economic repercussions.

For example, in the US, the construction sector alone accounts for about 40 percent of carbon emissions. A carbon tax would heavily penalize this industry, reducing its capacity to grow, generate new housing, and create jobs. Moreover, implementing a carbon tax involves massive administrative costs. The federal tax code is already complex and costly; a carbon tax would exacerbate these issues.

Determining net carbon emissions is a nuanced process subject to ever-changing and arbitrary federal definitions, increasing compliance costs for businesses and consumers.

A study by the Tax Foundation found that a carbon tax would cost billions of dollars annually in administrative costs, a burden that would ultimately fall on consumers through higher prices, less economic activity, and fewer jobs.

The US economy is already suffering from regulatory costs of $3 trillion annually, including many energy-related restrictions, and the Biden administration has added more than $1.6 trillion in regulatory costs since taking office.

One core principle of free-market capitalism is that it comes with limited government. A carbon tax contradicts this principle by expanding governmental regulation of everyday economic activities. The tax revenues would also enable further overspending, though that’s questionable given the supposed purpose of the tax is to reduce carbon emissions and, therefore, the taxes collected.

Furthermore, a carbon tax could favor certain production methods over others, disrupting the level playing field that free markets thrive on and leading to inefficiencies and market distortions. The government picks winners and losers by favoring specific methods, undermining competition and economic growth. Renewable energy projects are likely to receive preferential political treatment, skewing investments away from the market’s more efficient, practical technologies.

Pigouvian taxes, aimed at correcting negative externalities, are often cited to support a carbon tax. These taxes are named after economist Arthur Pigou and are designed to correct the negative effects of externalities by imposing costs equivalent to the external damage. But they can be counterproductive as they are bound to be the wrong tax rate, distorting economic activity.

Carbon taxes fail to account for complex economic interactions and unintended consequences. The PROVE It Act, for instance, proposes a new carbon tax framework but lacks a clear, consistent, and scientifically sound basis for implementation. This uncertainty raises the stakes for economic disruption and consumer cost increases.

Another critical issue in the carbon tax debate is ‘who decides?’

Climate science is ever evolving, and economic models predicting the outcomes of carbon taxes are fraught with uncertainties. Placing high costs on consumers based on unsettled science and unpredictable economic impacts is not a prudent policy approach. We should promote voluntary measures and technological advancements that naturally reduce emissions through market activity.

Importantly, the EPA does not consider carbon dioxide a harmful pollutant in the traditional sense, as it is essential for life. We need carbon dioxide to breathe and enjoy a fulfilling life. This further questions the rationale behind taxing carbon emissions, as it imposes undue economic strain in an attempt to regulate a naturally occurring and necessary element.

Even if America hadn’t been doing better than other countries that joined the Paris Treaty for goals on carbon emissions, China (and India) aren’t interested, thereby putting more of the unnecessary cost of reducing these emissions on Americans.

Moreover, the cost of carbon taxes can be significant. Increasing production costs leads to higher prices for goods and services, disproportionately affecting low- and middle-income households — especially when they already suffer from high inflation. This regressive nature undermines its purported environmental benefits, placing a heavier burden on those least able to afford it. For example, a $50-per-ton carbon tax could increase household energy costs by up to $300 annually, hitting hardest those who can least afford it.

Countries implementing carbon taxes, like some in Europe, have seen mixed results. Emissions reductions have been minimal, while economic growth has been hampered. These policies often result in job losses and decreased global competitiveness, showcasing the unintended consequences of such interventions. For instance, France’s carbon tax led to widespread protests and economic disruption, illustrating such policies’ social and economic challenges.

While the intention behind a carbon tax — to reduce American GHG emissions in an effort to combat global climate change — is questionable in itself, the economic realities and principles of free-market economics prove it is a flawed approach. With the fiscal storm likely coming next year, Congress should just say no to the PROVE It Act and the carbon tax in general.

The bottom line is that increasing the government’s footprint through such a tax is neither conservative nor market-oriented. Instead, we should focus on market-driven solutions that encourage innovation and efficiency without imposing heavy-handed regulations.

Source: AIER

Vance Ginn, Ph.D., is founder and president of Ginn Economic Consulting, LLC and an Associate Research Fellow with AIER. He is chief economist at Pelican Institute for Public Policy and senior fellow at Americans for Tax Reform. He previously served as the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20.

Follow him: @VanceGinn.

Image caption: Heavy air pollution partially obscures an aerial view of a Chinese factory. Chengde, China. 2018.

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