In the search for safety barriers at the edge of the US fiscal cliff, a carbon tax is a possible solution that’s expected to get serious attention during the remainder of 2012 and beyond.

As the new Obama Administration urgently seeks new sources of revenue ahead of the Jan. 1 trigger for automatic spending cuts and tax increases, and Congressional Republicans signal a post-election willingness to compromise on budget negotiations, the idea of a tax on the carbon content of fossil fuels is gaining traction as a measure that could meet the requirements of different groups.

In addition to satisfying the longstanding arguments of environmentalists that the cost of fossil fuels should reflect their true impact, a carbon tax might also be attractive to tax-averse Republicans because it would, if successful, diminish as fossil-fuel consumption declines.

Contentious Idea Gains Popularity

The idea of putting a price on carbon and simultaneously cutting the deficit is an attractive one that, while still a long shot, is seen likely to generate some real evaluation in the search for solutions to the budget crisis.

Its profile is also heightened by Hurricane Sandy, which has focused attention on any measures that may address climate change.

“I think it will get some serious discussion,” said Jeff Holmstead, an environmental attorney in the Washington office of the international law firm Bracewell & Giuliani.

The idea is generating some buzz in Washington policy circles, and the thought is that support from the Republican majority in the House – which may be more open to new ideas after the party’s election losses – could be bought with promises of easing regulation on the energy industry, Holmstead said.

A carbon tax is also being studied by the National Academies of Science for the U.S. Treasury, while the prospect of such a levy under the second Obama administration has been flagged by major banks including HSBC.

Among the conservative backers of a carbon tax is the Energy & Enterprise Institute, a Washington policy group that advocates a “tax swap” in which a levy on carbon emitters such as power plants would be imposed in exchange for lower income taxes, while tax incentives would be adjusted for the fossil fuel industry.

If it succeeds, the tax goes away because people stop using carbon.” – Jaffe

Such a reform would boost economic growth while forcing the price of carbon to reflect its true cost, a move that would make renewable fuels more attractive because they would no longer be subject to market-distorting subsidies for coal, oil and natural gas, said Bob Inglis, a former Republican Congressman who directs the institute.

Inglis acknowledged that such a major change in the tax system was more likely to be adopted in the long term than in the seven weeks or so before the fiscal cliff’s tax and spending measures kick in.

But he said House Republicans, who could hold the key to any Congressional approval of a carbon tax, are more likely to accept such radical change in light of the heavy defeat suffered by the party in the general election. “There’s a re-evaluation of our political standing,” Inglis told Breaking Energy. “We appeared retro and the country has gone beyond us. We’ve got to update our message.”

Sam Jaffe, an analyst with IDC Energy Insights in Denver, said he sees the possibility of a carbon tax as “exceedingly unlikely” but that its chances are still greater than they were before the election because there is a “new appreciation of reality” among lawmakers who are now more likely to accept that revenue needs to be raised.

“It’s more politically palatable than other taxes,” Jaffe said. “If it succeeds, the tax goes away because people stop using carbon.”