Carbon Tax: Two Problems Solved for the Price of One
Business + Economy

Carbon Tax: Two Problems Solved for the Price of One

REUTERS/Tim Wimborne

The devastating aftermath of Hurricane Sandy has breathed new life into the discussion of climate change and has revived interest in an old idea for a carbon tax. Advocates say the tax would discourage the use of fossil fuels and generate revenue to reduce the deficit or help finance infrastructure projects to minimize damage from future storms.

Opponents of the tax, including Carol Raulston, senior vice president of communications for the National Mining Association, called the carbon tax "very regressive." She said it would hurt low-income families "because lower income people spend more of their disposable income on energy, and since the carbon tax would likely be rolled into the price, energy costs would rise."

For example, if the U.S. imposed a carbon tax of $27 per metric ton of carbon, the average household could pay an extra $425 a year, according to the Congressional Budget Office. Not since former President Bill Clinton tried unsuccessfully in 1993 to push a general tax on all energy forms as part of a broader deficit reduction plan have policy makers and experts given serious thought to levying a tax on oil, gasoline and other fossil fuels that emit carbon into the atmosphere.

But the revived concern about the connection between carbon emissions by manufacturing plants, refineries and automobiles and global warming has spurred talk again – both on the left and right -- about considering a carbon tax as part of an overhaul of the federal tax code next year.

"I think the impossible may be moving to the inevitable without ever passing through the probable," former conservative Republican Rep. Bob Inglis of South Carolina told the Associated Press earlier this month.

Environmental advocates including former Vice President Al Gore have also been pushing a carbon tax as a way to bring in new revenue to narrow the deficit, while attempting to reduce carbon dioxide emissions which many scientists have linked to extreme weather, like Hurricane Sandy. "We can back away from the fiscal cliff and the climate cliff at the same time," Gore told The Guardian.

For his part, President Obama does not intend to propose a carbon tax, but indicated at his White House news conference last Thursday he would not stand in the way of one if Congress were to take the lead and approve it. "I am a firm believer that climate change is real, that it is impacted by human behavior and carbon emissions," he said. "As a consequence, I think we've got an obligation to future generations to do something about it."

Not surprisingly, the coal mining and oil and gas industry and many utilities strongly oppose any form of a carbon tax, saying it would seriously damage the economy and cost many jobs. Major producers of gas and oil have also warned that a tax on carbon emissions would make their companies less competitive in the global market. However, some companies including Exxon Mobil that have previously resisted a carbon tax now say they may be open to one if it’s revenue neutral – meaning that revenues raised by it would either be returned to consumers or used to offset the effects of a different tax.

Alan Jeffers, a spokesman for Exxon Mobil, the nation’s leading natural gas producer, told The Fiscal Times that the company is waiting to see a proposal before taking a position. He stressed, however, that Congress "shouldn’t target a particular sector" while generating revenue to reduce the deficit; rather, it should be "neutral across the economy."

For the time being, there is one piece of revenue-neutral carbon tax legislation floating around Washington. Last August, Rep. Jim McDermott, a Washington state Democrat and senior member of the Ways and Means Committee, introduced the Managed Carbon Price Act (MCP). McDermott’s bill would require coal, oil and natural gas producers to purchase permits from the Secretary of the Treasury to emit carbon dioxide – a major contributor to climate change. The permit prices set by the government would increase every five years. The MCP aims to reduce carbon dioxide emissions by 80 percent within 42 years based on 2005 levels. Of the revenue generated from the permits, 75 percent would be rebated to the public to compensate them for price increases, while 25 percent would go toward deficit reduction.

"We can no longer ignore the climate and revenue problems we have in this country, and a well-crafted carbon tax can help address both issues in a way that helps the economy and ensures meaningful emissions reductions," McDermott told The Fiscal Times. He added that he put the proposal forward right before August recess as a way to "spark discussion and awareness of a carbon tax, so that we have the best policy ready when Congress finally takes up tax reform."

A Congressional Research Service study released on the heels of McDermitt’s bill in September found that revenue generated by a fee of $20 per ton of carbon could cut the national deficit in half over ten years.

The idea of generating revenue through a carbon tax has support from a wide range of economists on both sides of the political spectrum, including conservatives Martin Feldstein, Glenn Hubbard and Gregory Mankiw to Harvard’s Robert Stavins, a left-leaning environmentalist. "The time seems ripe for this discussion. The president is committed both to raising tax revenue and to dealing with climate change. A carbon tax kills two birds with one stone," Mankiw, a Harvard economist who advised Republican Mitt Romney’s campaign, told the Wall Street Journal. 

However, passing a new tax on top of those likely to be implemented because of the expiring Bush era cuts is a long shot in Washington. Anti-tax advocate Grover Norquist staunchly opposes the carbon tax and said any increase in taxes would burden middle class families. "The creation of any new tax such as a VAT or energy tax, even if originally passed with offsetting tax reductions elsewhere, would inevitably lead to higher taxes," he said in a statement last week.