A Carbon Tax for Fiscal and Climate Stability

11.18.12

A Carbon Tax for Fiscal and Climate Stability

11.18.12
Power plant

The White House currently confronts a rare coincidence of environmental and fiscal pressures. Hurricane Sandy has raised the visibility of climate change as a national issue; the storm was the latest in a series of extreme weather events over the past ten years. Ocean surface temperatures have increased over the past few decades, and this trend contributed to Sandy’s gargantuan size and strength. Many scientists attribute this ocean warming to global climate change abetted by human activities.

Meanwhile, the imminent “fiscal cliff” threatens to end the U.S. economy’s recovery. “It’s unambiguously the case that these measures will slow down growth,” said Joseph Stiglitz, a Nobel Prize winner in Economics, in reference to the provisions mandated by the year-end budget agreement. Congressional leaders are scrambling for stop-gap measures, but are hesitant to commit to any one solution. A carbon tax, proposed by the White House, would address these grave concerns—helping the nation avert the fiscal cliff and stabilize its climate at the same time.

The carbon tax’s potential benefit to the country’s fiscal health is considerable. It would raise new revenue by taxing capital rather than labor. Unlike an increase in the payroll tax or the income tax, a carbon tax would stimulate work by making labor cheaper relative to capital. Also, the options currently considered by the White House and Congress—income tax hikes, payroll tax hikes, and entitlement reform—will probably not raise enough total revenue to plug the deficit.

A recent Congressional Research Service report indicated that a $20 per metric ton tax on carbon emissions could halve the deficit within a decade, depending on the fluctuation of the deficit and electricity demand. Such a tax would rise at about 6 percent per year, and raise about $93 billion in 2013 and $154 billion in 2021. This would translate roughly to a 20 cent per gallon surcharge at the gasoline pump, and a $14.50/month surcharge for the average American household’s electricity bill. A carbon tax provides sufficient revenue to be a crucial piece of a grand bargain. In the short term, it could provide Hurricane Sandy disaster relief funds.

A carbon tax would need to be tailored carefully to avoid shocking the economy in the short-term, as consumers adapt. A tax at the production level—at the oil wellhead, the coal mine, and the port of trade—is a better choice than a tax on emissions. Emissions are difficult to measure over the entire economy, especially at the tailpipe. A producer-level tax would produce just as much revenue as tax on emissions, if not more, and would accomplish it more efficiently. The massive U.S. corporations that extract coal, oil, and oil shale already have the compliance departments and technology necessary to determine carbon concentration at a low administrative cost and high level of accuracy.

The carbon tax should be phased in gradually, moreover, to allow consumers to adapt to new prices. A rebate program for low-income and fixed income households would probably be necessary to ease the impact, as consumers take steps to lower their electricity bill and change their transportation habits. The Canadian province of British Columbia imposed a carbon tax in 2008 at $10 per ton and increased the tax rate each year since. Carbon emissions have declined and the province’s economy has grown, albeit slowly.

Obama and New Jersey Gov. Chris Christie look at Hurricane Sandy storm damage along the coast of New Jersey on Marine One, Oct. 31, 2012. Pete Souza/White House

Beyond budget concerns, the carbon tax is one of the most effective tools available to climate policy reformers in the White House and in Congress. The environmental benefits of such a regime include lower carbon emissions and greater stimulus for the renewable energy and natural gas sectors. It’s also probably the most powerful pro-environment instrument under discussion that stands a realistic chance of passage through Congress.

Even before Hurricane Sandy struck, the pattern of chaotic weather over the last ten years—Hurricane Katrina, Snowpocalypse 2010, recurring Midwestern drought and wildfires—have persuaded the American public that climate change is real. An April poll by the Yale Project on Climate Change Communication and the George Mason University Center for Climate Change Communication found that 75 percent of Americans support “regulating carbon dioxide (the primary greenhouse gas) as a pollutant.” A November Rasmussen poll indicated that 68 percent of American voters said that global warming is either a “very serious” or “somewhat serious” problem.

Hurricane Sandy has presented the White House with a chance to convert the crisis into reform. The New York City nightscape is dimmed; New Jersey’s Seaside Heights waterfront lies in tatters; and businessmen on Wall Street and Main Street clamor for fiscal sanity. In this pressurized political setting, where the American public expects and demands a deal to avert the fiscal cliff, and the public has greater awareness of the planet’s climatology, the White House should negotiate with an open mind. It should not take carbon taxation off the table so quickly. While no single weather event can be directly tied to climate change; the images of Sandy’s aftermath have surely pushed public opinion toward climate change reform. Even skeptics of the storm’s relationship to climate patterns will probably concede ground to the president on tax policy, if a budget deal is reached in consequence. The House GOP leadership may be cold to a carbon tax now, but every day without a deal exerts more pressure on them to compromise.

The national coalition for carbon taxation has diversified beyond the traditional environmentalist lobby. It has welcomed major conservative and capitalist thinkers to its ranks: former Secretary of State under the Reagan administration, George Schultz; former Republican Congressmen Sherwood Boehlert, Wayne Gilchrest, and Bob Inglis; former CEO and Chairman of Duke Energy, Paul Anderson; and FedEx CEO Fred Smith.

Global banks HSBC and Citigroup have signaled openness to carbon tax as a policy option. “One major fiscal possibility is a new carbon tax, which is likely to garner far more support this time around than at any time in the past and could become an appealing part of an emerging consensus on how to avoid the fiscal cliff,” said Citigroup in a recent note by their investment research group. These banking giants point to the most practical feature of a carbon tax—its ability to reduce the size of the massive national deficit. Inclusion of a carbon tax as part of a grand deficit reduction deal could cut the deficit in half by 2022, according to an HSBC report.

A carbon tax is the sort of solution that appeals to economic conservatives in the Republican Party. It’s what economists call a Pigovian tax—a fiscal instrument designed to stop bad behavior. Economists and business leaders tend to support such measures because they correct behavior efficiently. More and more Americans agree that carbon dioxide can harm the environment when it functions as a highly concentrated greenhouse gas. In economics terms, carbon is priced too low by the market; a tax would address this market failure. More study is necessary to determine the exact price necessary.

New York City Mayor Mike Bloomberg could be a formidable ally in a White House bid for a carbon tax. Bloomberg, owner of an estimated $25 billion fortune, has proposed a carbon tax of $15 a ton that rises at 4 percent above inflation; this rate would generate $310 billion by 2050 and cut emissions by 34 percent. He is a political independent respected on both sides of the aisle, and he will surely be commuting to Washington regularly in the coming weeks as he secures federal disaster relief. Most important, Bloomberg commands a national audience as he oversees his city’s reconstruction. The carbon tax approach is consistent with the president’s best rhetoric. It is grand in scope but also practical. The White House should broach the carbon tax with congressional budget leaders now. The policy window may be gone at year’s end.

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