Is a US carbon tax coming?

Academics and lawmakers have proposed a US carbon tax to curb carbon emissions and trim the debt pile, but the idea depends on prominent Republican support, so far absent.

Without a deal on cutting the fiscal deficit the United States faces a $600 billion package of automatic tax increases and spending cuts which could tip the country back into recession.

While that is clearly a step too far, the consensus is that a more gradual combination of spending cuts and/or tax hikes is required to avoid a borrowing crisis.

Many economists have argued for a carbon tax: it would lead to net welfare benefits compared with for example hikes in income tax, even before allowing for avoided climate change.

But it faces formidable problems in getting Republican support.

It would acknowledge a climate threat, hike energy prices, hurt US competitiveness (without including complicated compensating measures), and sound very much like a failed cap and trade bill.

To progress, supporters would have to paint a nightmare alternative including cuts in defence and social spending and income tax rises, and demonstrate clear daylight with a proposed cap and trade scheme which failed to win Congress approval in 2009.

Some energy executives and notably Exxon's chief executive have previously said they much prefer a carbon tax.

A cap and trade bill only narrowly passed the House of Representatives by 219-212 in June 2009 before mid-term elections saw Republicans take a House majority, and failed to pass the Senate.

Price

A carbon tax, or cap and trade scheme makes emitters pay for climate damage from burning fossil fuels and so drives a shift towards cleaner alternatives.

The notion of using carbon pricing to cut the US budget deficit dates back to the Congressional Budget Office (CBO) report in March 2011, "Reducing the Deficit: Spending and Revenue Options."

The CBO reviewed cap and trade, or a carbon tax among 104 other options for raising tax revenues or cutting spending.

It reported that a scheme which applied a carbon price of $20 tax per tonne of CO2 would raise nearly $1.2 trillion by 2021.

Costs would be passed to energy consumers, its biggest political problem not always mentioned by economists, requiring some compensation which would steal funds from deficit cutting.

"The government could use some of those revenues to accomplish various goals such as reducing taxes, offsetting the costs of the cap-and-trade program for certain groups or industries that are put at a competitive disadvantage by the program, or reducing the federal deficit," the CBO report said.

Economics

A Massachusetts Institute of Technology (MIT) study in August found that a carbon tax would have a net economic benefit compared with allowing certain Bush-era tax cuts to expire, while still cutting the deficit.

Effectively they would swap one tax (on income, if Bush cuts expire on December 31) for another (on carbon).

The authors attributed the net economic benefit to a greater "drag" on the economy from income tax than a carbon tax.

The study did not quantify other benefits such as avoided climate change or lower crude oil imports, or try to compensate energy consumers.

"Given that all other options for dealing with the federal deficit require difficult tradeoffs, it would seem hard to pass up one that offers so many advantages," the authors concluded in their paper "Carbon Tax Revenue and the Budget Deficit: A Win-Win-Win Solution?".

As Joseph Stiglitz said, in support of a carbon tax in his 2006 book "Making Globalisation Work":

"The country as a whole might be better off; it can use the revenue from the carbon tax to reduce other taxes, such as those on savings, investment, or work. These lower taxes would stimulate the economy, with benefits far greater than the cost of the carbon tax. This is consistent with a general economic principle: it is better to tax things that are bad like pollution than things that are good like savings or work."

Energy

Support from economists is one thing.

Given expected higher fossil fuel energy prices and therefore lower consumption, an endorsement by Exxon Chief Executive Rex Tillerson three years ago was more startling.

But that was in the context of shooting down cap and trade proposals when no alternative tax was suggested, and may therefore be more significant for rejecting one than supporting the other.

"As a businessman it is hard to speak favourably about any new tax. But a carbon tax strikes me as a more direct, a more transparent and a more effective approach (than cap and trade). It could be levied under the current tax code without requiring significant new infrastructure or enforcement bureaucracies," Tillerson told a Washington energy security conference in 2009, as quoted in the Exxon journal "The Lamp".

"A carbon tax is also the most efficient means of reflecting the cost of carbon in all economic decisions – from investments made by companies to fuel their requirements to the product choices made by consumers.

"Such a tax should be made revenue neutral. In other words, the size of government need not increase due to the imposition of a carbon tax. There should be reductions or changes to other taxes - such as income or excise taxes - to offset the impacts of the carbon tax on the economy."

Politics

The biggest practical problem of a carbon tax is softening its impact on energy consumers and energy-intensive industries.

The European Union has demonstrated that distribution problems can be solved, where for example power plants in poorer east European countries face a softer transition, and factories which face international competition get free emissions permits.

But political efforts now to raise European carbon prices face opposition from some member states, concerned about higher energy prices, even though it would raise funds for government coffers, in the same way as a US tax.

In the face of undoubted, entrenched opposition from certain stakeholders including energy-intensive manufacturers and farmers, the only chance for a carbon tax in the United States is if Democrats prioritise it, and Republicans accept it as the least-worst option, for environmental legislation.

This article was originally published by Reuters. Republished with permission.