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Portney_smBy Paul Portney, Dean of the Eller College

Cross-posted from the National Journal Online, Energy & Environment Blog

It is still far from clear whether a cap-and-trade approach to carbon control will emerge from congress for signature by President Obama. The smart money seems to suggest that it will not. IF cap-and-trade fails, it’s fair to open up the debate again to see if there is an alternative that is preferable. Despite being in the minority on this issue, I believe that we would do much better in the U.S. to approach climate control using a carbon tax. To be sure, there are respects in which cap-and-trade may be preferable to a carbon tax, not the least of which is that — until now, at least — the belief among experts is that the former is more politically palatable than the latter. But if a cap-and-trade bill cannot be passed, it’ll be time to reconsider that argument.

Briefly, the advantages of a carbon tax are its transparency, the reassurance it provides to business that costs will not go sky-high and, finally, its revenue raising potential. This last point is by far its most compelling advantage.

Regarding transparency, except for those recent arrivals to planet Earth from other galaxies, just about everyone realizes that a cap-and-trade approach will raise the price of fossil fuels (oil, coal and natural gas). In other words, cap-and-trade is a tax on the latter, though not in name. That’s exactly how it will end up reducing fossil fuel consumption and, hence, carbon dioxide emissions. And naturally, that’s why politicians prefer it to a straightforward tax. But the public understands this by now and may — just may — prefer to be taxed in an open and transparent way.

If one believes as I do that at least some business support will be required for any serious carbon control effort, the chances of eliciting it will be greater under a carbon tax than under cap-and-trade. This is because under the latter (in which the quantity of emissions is subject to a hard cap), there is no certainty about what the price of carbon control will be. This will make it more difficult for businesses to commit to the needed investments in carbon mitigation (though one could make a similar argument about carbon taxes, I concede).

Finally and most importantly, a warmer world is not the only serious burden we may be leaving for our descendants. The federal budget deficit for 2009 was $1.6 trillion, or 11.2 percent of GDP. According to CBO it will be $1.4 trillion for 2010 and will be no lower than $540 billion for any year during the entire decade. By the end of the “teens,” and unless these two programs are significantly reformed, baby-boomers will be retiring by the millions and beginning to collect Social Security and Medicare. AARP will do everything it can to see to it that any reforms will be minor. This means that we are headed back toward trillion-dollar annual deficits in the future, even if the economy recovered from its current swoon.

Expenditure cuts can and must be part of the way we deal with this future fiscal disaster. But it’s obvious that the federal government will need new revenues, too. Rather than raise taxes on our labor (income taxes) or savings (capital gains taxes), why not tax things we want to discourage rather than encourage? A carbon tax that started off gradually and rose according to schedule over a twenty or thirty year period could provide much-needed revenues to help reduce the deficit. This, incidentally, could be accomplished through a cap-and-trade approach, of course, if all the permits were auctioned off. But we saw over the past year how congress could not resist the temptation to hand out permits free of charge to a variety of favored constituencies (some of whom were quite reasonable candidates for assistance). If a significant fraction of the revenues from a carbon tax were firmly pledged for deficit reduction, rather than handed out to congressional supplicants, a carbon control bill could fairly be billed as “Double Dividend for the Future.” This just might win broader and more passionate popular support than cap-and-trade was able to attract in 2009.

This is a rare opportunity to kill (or at least wound) two birds with one stone, both of which pose serious threats to our children’s and their children’s well-being in the decades ahead.