BCA hurts economy - inflation

Carbon taxes, and their functional equivalent disguised in the form of energy taxes, have faced political obstacles and serial failures to take effect ever since the debacle of the 1993 Clinton–Gore “BTU” tax. Now a bipartisan group of American lawmakers has  a “border carbon adjustment” tariff intended to reduce society’s use of hydrocarbons and usher in energy innovation. But carbon taxes have failed, so far, for good reason: they’re a bad idea and would do little to cut hydrocarbon use or stimulate productive innovations. And whether framed as a border adjustment or as the broad-based levy that Congress toyed with enacting three years ago, any carbon tax would be inflationary—meaning this latest proposal couldn’t come at a worse time.

It’s easy to ignore the benefits of cheap energy when, well, it’s cheap. Energy is needed for everything that is fabricated, grown, operated, or moved. Since hydrocarbons directly supply 84 percent of the world’s energy and are indirectly embodied in all the rest, the inflationary potential of any carbon tax is clear. In normal times, energy typically accounts for only about 10 percent of the cost of most products and services. But double the spending on energy, and the average overall final price tag for a product or service rises at inflationary levels. With today’s energy prices already doubled, or more, the consequences are apparent. Over half of wheat’s , for example, is a direct result of higher prices for natural gas, the fuel needed to make fertilizer.

The energy-inflation arithmetic is equally clear at the macroeconomic level. Before the runup in global energy costs—a trend that began well before the war in Ukraine—global spending by consumers and businesses on energy accounted for about 10 percent of global GDP. Double energy costs, and you don’t get more GDP: you get inflation.

Advocates claim that a carbon tax is an efficient way to reduce hydrocarbon use because it “disincentivizes” their use by simply raising the price. Whether the mechanism is directly to tax energy to make it more expensive, or indirectly to tax it by making it more expensive to buy imported products built in other more hydrocarbon-intensive countries, both have the stated purpose of raising prices. High energy prices do indeed discourage consumption, but they also debilitate citizens and economies, especially during times of inflation. So carbon-tax advocates propose that some of those collections would flow back to the economically disadvantaged—which would be pretty much everybody if a tax or tariff were high enough to curb energy use meaningfully.