A Carbon Tax to Combat Global Warming is Getting a Fresh Look
Policy + Politics

A Carbon Tax to Combat Global Warming is Getting a Fresh Look

With world leaders, environmentalists and even Pope Francis clamoring for tough action to slow the rate of growth of greenhouse gas emissions -- a major factor in climate change -- the idea of imposing a tax on industrial carbon emissions and pollutants is getting a fresh look.

It has been more than six years since lawmakers, business leaders and economists seriously discussed using a carbon tax or free-market credit system to control emissions in the battle against global warming.

Related: Pope Francis is Stirring the Political Pot on Global Warming

The House in 2009 approved a bipartisan “cap and trade” bill designed to impose ceilings on industrial carbon emissions, while allowing utilities and other businesses to swap credits to meet their targets. But the bill authored by former Democratic Reps. Henry Waxman of California and Edward Markey of Massachusetts – now a senator – was defeated, the victim of industrial and anti-tax forces and general fears about a faltering economy.

President Obama once praised the idea, but dropped it after the Senate defeat. Few thought that either cap and trade or a carbon tax would ever again see the light of day. That view is changing as the U.S. and other major industrial powers explore ways to meet their pledges ahead of an international global warming conference in Paris late this year.

Last month, Democratic Sens. Sheldon Whitehouse of Rhode Island and Brian Schatz of Hawaii unveiled the American Opportunity Carbon Free Act, a bill that would impose a $45 per metric ton fee on carbon dioxide emissions from fossil fuel. The proposed tax reflects the federal government’s latest estimate of the “social cost of carbon” – the measure of the damage that climate change causes to the environment, public health and the economy

Related: Graham Blasts His Own Party for Ignoring Global Warming Threats   

Whitehouse and Schatz contend that their proposed tax – which would be increased by two percent per year – along with government credits for carbon sequestration could cut U.S. emissions by at least 40 percent by 2025 – a reduction far greater than the 26 percent to 28 percent the United States has pledged to achieve through regulatory changes over the same period. Rep. John Delaney (D-MD) is promoting a similar version of a coal tax.

The Tax Policy Center at the Urban Institute and Brookings Institution and other think tanks have begun promoting a carbon tax as a vital component of comprehensive tax reform.  While it’s unlikely that Congress will take on major tax reform until after the 2016 presidential election, proponents say they want to get an early start in building support for a versatile tax that could generate tens of billions of dollars that could be used for an array of worthy causes.

“The resulting revenue could finance tax reductions, spending priorities or deficit reduction – policies that could offset the tax’s distributional and economic burden, improve the environment, or otherwise improve Americans’ well-being,” economist Donald Marron and researchers Eric Toder and Lydia Austin wrote in a new report for the Tax Policy Center.

The authors argue that finding a way to restrict carbon emissions of literally millions of businesses, consumers and government agencies through piecemeal federal and state regulatory measures will be difficult and needlessly costly under almost any circumstances. What’s more, direct regulation by the Environmental Protection Agency and other government entities does little to reward innovation beyond regulatory minimums, they say.

Related: Despite Evidence, Global Warming Ranks Low on Americans’ Worry List  

By contrast, pursuing market-based approaches that place a fixed price on carbon emissions “would allow the market to do what it does best: encourage consumers and businesses to reduce emissions at the lowest cost and provide an ongoing incentive for innovators to develop new ways to reduce carbon emissions,” the Tax Policy Center report declared.

Estimates vary on what the tax would raise. Marron’s study, which extrapolated 2013 projections of the Congressional Budget Office and Joint Committee on Taxation, predicts that a coal tax beginning at $25 per ton could generate about $90 billion in the first year and $1.2 trillion over the coming decade.

Yet moving a carbon tax from a white board to reality will be challenging. And the proposal is sure to draw strong opposition from utility and business leaders who have argued that a coal tax would hurt the economy and cost jobs. Moreover, critics warn of adverse distributional effects of a carbon tax, depending on how policy makers decide to deploy the revenue.

A carbon tax unquestionably would be regressive, meaning it would hit the lowest quintile of taxpayers much harder than it would harm wealthier Americans. As a rule, lower income households spend a much larger share of their disposable income on carbon-intensive products like gasoline, home heating oil and electricity. Unless Congress were to approve coal tax rebates or other forms of tax relief to compensate low and middle-income Americans for their higher fuel costs, a coal tax would pose an extreme hardship on them.  

That was a point made by House Ways and Means Committee Chair Paul Ryan (R-WI) in an interview earlier this year with the Madison State Journal. Ryan said he doesn’t like either cap and trade or a straight up carbon tax – even one that was rendered “revenue neutral” by providing rebates or other compensatory tax break to lower income people.

I think these tax-and-spend ideas are the wrong way to go,” Ryan said. “They hurt economic growth. They’re very regressive. They hurt people who rely on disposable income solely — the poor. And they make our manufacturing industry much less competitive.”

Related: Obama’s Budget Boosts EPA to Fight Climate Change

 Still, the tax has appeal among some conservatives.  Jerry Taylor, a veteran energy expert at the libertarian Cato Institute, formed a new organization earlier this year to encourage Republican lawmakers to support a sweeping set of taxes on carbon emissions, according to The Wall Street Journal.

According to Taylor, the carbon taxes would be part of a “grand bargain” between conservatives and liberal Democrats that would include corresponding cuts in other corporate taxes and the elimination of federal fuel standards and greenhouse gas emission regulations. Some might consider that idea far-fetched, but Taylor insisted it was plausible.

"You can be an absolute denialist [about climate change] and still embrace the logic of swapping out regulations for taxes,” he told the Journal.

Marron believes that a carbon tax in some form or another is a possibility in the future, although he cautioned that comprehensive tax reform “is a heavy lift.”

“It’s obviously not a 2015 issue or a 2016 issue,” he said in an interview last week. “There is a lot of work to be done to lay down a foundation, think through the issues and get the intellectual, conceptual and practical base so that when leaders are ready to entertain this as a serious notion, we have thought through the hard issues.”

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