It was a big week for the concept of a carbon tax in Washington.
A carbon tax, which combines two politically difficult propositions taxes and climate policy -- would not seem to be the most plausible option in the U.S. right now, except for one important feature: it can raise boatloads of revenue. And more revenue is something the U.S. government is probably going to need, says the CBO:
The aging of the U.S. population and the rising costs for health care mean that the combination of budget policies that worked in the past cannot be maintained in the future.To keep deficits and debt from climbing to unsustainable levels ... policymakers will need to increase revenues substantially above historical levels as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches.
Tax increases are indeed coming if Congress does nothing. President Obama’s payroll-tax relief and the Bush tax cuts are both scheduled to expire in January 2013. If lawmakers want to keep those popular cuts and avoid the somewhat hyperbolically named “Taxmageddon,” they’ll have to find offsets somewhere and a reform involving a carbon tax might be the ticket. According to RFF’s recently released FAQ on the topic, most experts suggest a tax of around $25 per ton of CO2, which would raise approximately $125 billion annually.
RFF’s President Phil Sharp was among those testifying before the Senate Finance Committee this past Tuesday on the subject of tax reform and energy policy. A carbon tax came up on a few occasions but the bulk of the discussion focused on the fairness or unfairness of the existing mountain of energy-related tax breaks and tax expenditures. In his written testimony, Sharp identified some of the attractive facets of a carbon tax (while acknowledging it's "not yet ready for prime-time"):
- It is a policy that fits well with market economics.
- It could generate revenue that, if recycled into the economy by cutting so called distortionary taxes, has the potential for contributing to economic growth rather than being a depressant.
- It has many design options that make it possible to address a variety of the concerns expressed about carbon policy, such as the impact on trade-sensitive industries.
- It could begin modestly and rise over time, permitting adjustment.
- It could reduce the need for more extensive subsidies and regulations to address the climate problem.
At the same time, a carbon tax was getting a strong boost from another corner. IMF President Christine Lagarde was advocated a price on carbon at Tuesday’s Center for Global Development event in anticipation of the Rio Summit.
Perhaps we can help with a simple concept that everybody can understand getting the prices right. Getting the prices right means using fiscal policy to make sure that the harm we do is reflected in the prices we pay. I am thinking about environmental taxes or emissions trading systems under which governments issue—and preferably sell—pollution rights.
Lagarde announced the release of an IMF "handbook for policymakers" on the topic, Fiscal Policy to Mitigate Climate Change, with contributions from current and past RFFers like Alan Krupnick, Roger Sedjo, Rob Williams, and Ian Parry.
The policy environment for a carbon fee is promising; unfortunately, the political headwinds remain pretty daunting. The Brookings Institution released a separate study this week on the U.S. public’s attitudes toward climate policy.
Americans tend to be opposed to those kinds of policies most commonly endorsed by economists, namely taxes and emission trading mechanisms that utilize market principles in attempting to achieve cost-effective reductions. In contrast, Americans tend to support those kinds of policies least commonly endorsed by economists, including a range of regulatory programs related to energy development, industrial emission controls, and vehicular fuel mandates.
This is, to put it mildly, something of a marketing challenge. But the good news for climate policy supporters is that while they begin their long uphill battle to develop an economically sensible policy that addresses the climate challenge, the Clean Air Act is moving along thanks to one of the few forces in American politics more powerful than anti-tax mania: inertia. And, according to research by my colleague Dallas Burtraw and others, at least in the short term, it can deliver a lot in terms of cost-effective reductions. But existing law isn't a good long-term solution, either on environmental or economic grounds. The US needs a climate policy, and it needs to reform its fiscal policy. This is a chance to do both at once.
