A carbon tax introduces enormous administrative complexity, BAT magnifies the link.

Marie Sapirie: Turning to the existing carbon tax proposals. A critique of them generally is that they will introduce complexity and administrative burdens. They're also potentially regressive and less rebated to lower income taxpayers in some way, and are economically disruptive. Could you tell us about the challenges to implementing a carbon tax that need to be considered? David Kreutzer: Pretty much anything that raises energy costs is going to be regressive because people with lower income spend a higher percentage of their income on energy, on gasoline, on heating, and so on. A carbon tax would be no different than just simply any regulation that would do the same thing. The other complexities are where do you charge the tax? You could imagine the carbon tax proposal being similar to the cap and trade proposal, where they looked at oil and petroleum refiners, taxing the refiners, taxing natural gas producers, and taxing coal at the mine mouth. But there is also going to be problems with what you do with people who are doing offsets. Certainly that's going to be part of it because Wall Street wants to have something to trade. Then you get up, well, how much carbon is saved by a farmer that uses no till in Iowa that otherwise was going to use a plow? All of that introduces scientific complexity, as well as just administrative complexity. They're also simply administrative costs. Any tax has administrative costs. You'd want to look at whether those would be significant compared to whatever benefit you're trying to provide and the problem of people viewing the carbon tax not as a market efficiency generator, but as a revenue generator. Marie Sapirie: Are there ways to avoid or to minimize some of the potential problems with the implementation of a carbon tax? David Kreutzer: I think it's difficult to avoid the ones that I just laid out. Economists have a bad habit of coming up with wonderful ideas that work in the abstract and ignore the politics of actually getting them implemented. One of my professors won a Nobel Prize doing something called public choice and saying, "You need to look at what are the political incentives that come around with these various tools that you want to implement." I did some modeling of the revenue part of a carbon tax with some colleagues when I was at the Heritage Foundation. Even a carbon tax of $25, $30, growing by the rate of interest, generates hundreds of billions of dollars a year in revenue. It also does hundreds of billions of dollars of economic damage to the economy each year. If the solution to a problem is going to fund your pet project, you're much more likely to believe there is that problem. I think we see that. People on Capitol Hill talk about we need to fix the climate problem, but they're really excited about the revenue. Marie Sapirie: Recent carbon tax proposals include a border adjustment. An export rebate coupled with an import tax equal to the domestic tax. What are the merits and the potential problems in that approach? David Kreutzer: Yeah, that maybe is the most compelling sounding part of this thing. But it is, I think, the most dangerous. It is a constant battle to keep people that want tariffs and other trade restrictions at bay. There are always special interests that want to protect whatever their industry is or whatever their product is. It's an almost impossible task for economists to keep that as low as possible. This carbon border adjustment would be very, very difficult to set up. I mean, you'd have to know, for instance, if you're bringing in a car from Japan, how much of a carbon tax did they have in Japan? Did they import something from Korea where they had a different carbon tax? Did they use steel from some other country? What's the carbon content that hasn't been taxed and all of these products that are coming in?