The best way to reduce emissions of greenhouse gases is to put a tax on carbon. Almost all economists would agree. Yet there’s even wider agreement, and not just among economists, that a carbon tax can’t happen. In the United States, it’s assumed, the idea will always be unpopular.
Why would a carbon tax be so much better than quantitative emissions controls like the ones just proposed by the Environmental Protection Agency? Because it allows the greatest possible flexibility in meeting any given target for lower emissions. Unlike caps on emissions from cars or power plants, say, or subsidies for this or that form of clean energy, a tax lets market forces organize the economy’s response. This ensures that emissions are cut where it’s easiest and cheapest to cut them.
To be fair, the EPA’s recent proposals follow this thinking as far as possible. The target of cutting power-plant emissions of carbon dioxide by 20 percent between 2005 and 2020, and 30 percent between 2005 and 2030, allows for a variety of approaches. Within a single sector of the economy – electric power – the aim is to mimic the advantages of a carbon tax. State and regional cap-and-trade systems, operating across the economy as a whole, move closer still to the carbon-tax model. But why struggle to mimic the desirable properties of a carbon tax, with all the complications this entails, if you can simply have a carbon tax?
The standard answer is politics. The EPA can regulate power-plant emissions without new legislation, whereas a carbon tax requires Congress to act. The need to build political support is a formidable obstacle but not an insuperable one.
Granted, some Republicans oppose a carbon tax merely because it recognizes climate change as a problem requiring action. And many more Republicans oppose a carbon tax – even one offset by tax cuts elsewhere – simply because it is a new tax. Among this latter group, at least, the argument can be recast: The idea is not so much to impose a new tax as it is to reduce government intervention in the economy.
Instead of listing all the fine things a carbon tax could buy, advocates of such a tax should simply offer to give back all the revenue in the form of tax cuts elsewhere.
It’s a worthwhile trade because a tax is by far the best way to reduce carbon emissions, which again is the whole point of this exercise. Consider a modest tax of $16 a ton of carbon dioxide, rising at 4 percent a year above inflation. It would reduce power-sector emissions by more than the EPA proposals for the energy sector would, and curb emissions across the rest of the economy as well.
A $16 a ton tax would also add about 16 cents to the price of a gallon of gasoline and raise household energy costs by 5 percent to 20 percent, depending on the source.
Yes, families and businesses would be paying a new tax. But no, families and businesses would not be paying more tax. The new carbon tax would raise about $1 trillion over 10 years and almost $3 trillion over 20 – a handy sum. That would be enough to send every U.S. resident a check for about $300 in the first year (with bigger checks to follow). It would be more than enough to cut the corporate tax rate to 28 percent from 35 percent, for instance, or take a bite out of payroll taxes, or some of both.
This would inevitably lead to an argument over which taxes to cut. But at least it would be framed by a shared assumption: that a carbon tax is good policy.