Taxing carbon could reduce US consumption of fossil fuels and significantly cut the yawning U.S. budget deficit but would affect low-income people the hardest unless offsets are built into it, economists and tax experts said on Tuesday.
As Congress and the White House seek alternatives to the “fiscal cliff” of sharp tax hikes and spending cuts set to kick in on January first next year, experts on fiscal and environmental policy gathered at the American Enterprise Institute for a day-long discussion on a possible major new source of revenue that would also cut carbon emissions.
If carbon was priced at $20 a ton of CO2 emissions starting in 2015 and rose at an annual 4 percent above inflation, it would raise $100 billion in the first year, rising to $400 billion – or around half of the stimulus package introduced by the Obama administration in 2009 – by 2040, said Aparna Mathur of the AEI, in a presentation.
Although revenue from the tax would eventually shrink as users of fossil fuels – from power generators to individual consumers – cut their consumption, it would do less damage to the economy than other forms of deficit reduction, Mathur said at the event that was cosponsored by the Brookings Institution, the International Monetary Fund, and Resources for the Future, an environmental research group.
And she argued that a carbon tax would be less costly and more efficient than any effort by the Environmental Protection Agency to regulate greenhouse gases in light of its 2009 decision that GHGs represent a threat to the health of current and future generations.
“A GHG tax can reduce the need for both more burdensome regulation and other federal outlays and tax expenditures,” Mathur said.
If carbon was taxed at $15 a ton of CO2, the cost of direct energy consumption for the average householder would rise by 19 percent for natural gas and 5 percent for electricity, Mathur said. Indirect cost increases would range from less than 1 percent for food at home to just over 2 percent for air transport, she said.
Still, the study confirms the convention wisdom that a carbon tax would be “quite regressive” when measured relative to current income, and so it should be designed to lessen the impact on low-income households, Mathur said.
Revenue from a carbon tax could replace some of the proceeds of federal corporate and personal income taxes, according to the study. A $15 carbon tax could have been “swapped” for half of corporate tax receipts and 12 percent of those from individuals in 2010, it found.
A carbon tax has the capacity to reduce emissions more than most of the other options out there,” – Williams
But another recently-released study argued that such a tax swap would hurt economic growth and result in a net tax increase on Americans.
Robert Murphy, senior economist for the Institute for Energy Research, a research group that advocates a free-market approach to energy policy, said a carbon tax is more likely to be used to help fix the budget deficit than to cut carbon emissions.
“The dismal record of the US government in implementing efficient climate-change policies is hardly evidence in favor of a massive new carbon tax (or cap and trade) program,” Murphy said in a statement. Rather, such a program is likely to be abused by favoring politically powerful groups such as clean energy producers who he said should not need the support of a carbon tax.
Murphy also argued that federal and state governments already have carbon-reduction programs such as CAFE and renewable portfolio standards, whose existence he said weakens the case for a carbon tax.
But Roberton Williams, an economist at the University of Maryland and a fellow of RFF, said a carbon tax would do more to cut emissions than measures such as renewable portfolio standards.
“A carbon tax has the capacity to reduce emissions more than most of the other options out there,” he told the AEI meeting.
Williams argued that a carbon tax would be more transparent than other forms of emissions reduction such as the cap-and-trade plan that failed in the Senate this year, and so is more likely to win political support.
More criticism of a carbon tax came from U.S. House Republican leaders who said Thursday they would continue their opposition to the idea in the new Congress. A statement by the conservative group Americans for Prosperity said Speaker John Boehner and House Majority Leader Eric Cantor are among top Republicans who have signed a pledge against such a tax.
“Carbon taxes are once again being floated as a way to raise revenue so that Washington can skip the hard work of actually getting runaway entitlement spending under control,” said James Valvo, director of policy for the AFP. “Using a carbon tax to address the deficit would clearly be a violation of the pledge that the entire House Leadership team for the 112th and now 113th Congress have already pledged not to do.”
Jack Calder, technical adviser to the IMF’s Fiscal Affairs Department, said a carbon tax should be levied at upstream points such as coal mines or natural gas wells, where the fossil fuels enter the economy. Such an approach would have the advantage targeting a relatively small number of taxpayers that would be easily identified, he said.
