By Climate Guest Blogger on Nov 14, 2012 at 5:00 pm
by Richard W. Caperton
If you had told me on Tuesday morning that I was about to spend my
day at a standing room only event that had nothing to do with the
election, I would’ve said, “But, I’m not planning to go to a David
Petraeus news conference!” Ah, but it turns out that there are other
topics that bring out the masses. I did, in fact, spend the day at a
standing room only event that had nothing to do with the election.
The topic? Carbon taxes, of course.
Yesterday, the American Enterprise Institute hosted a conference to
talk about anything and everything related to the economics of carbon
taxes. Normally, a full-day conference with more than a dozen speakers
on a tax issue in DC will be lucky to get more than a few dozen
attendees, even with a free lunch. Carbon taxes, though, are
different. The enthusiasm for this issue is such that there were over
200 attendees, many of whom stood for half the day.
What makes carbon taxes different? Simply put, people across the
political spectrum now know that putting a price on carbon is an
indispensable tool for dealing with our climate and budget problems, and
that a carbon tax is the most politically viable path forward. This
dynamic has created an exciting amount of momentum that now needs to be
turned into policy.
Not only is the political situation ripe for a carbon tax, but
yesterday’s AEI conference demonstrated that the thought leadership is
ripe as well. That’s not to say that there’s agreement on the best way
to design a carbon tax; the ultimate design will likely be about
political decisions as much as policy ones. But, the implications of
different policy choices are largely known, which was the focus of the
conference.
The benefits of a carbon tax would be tremendous. According to the
Brookings Institution’s William Gale, the amount of money a carbon tax
could raise is roughly comparable to the size of the Bush tax cuts,
indexing the alternative minimum tax for inflation, or the budget
sequester that’s part of the upcoming fiscal cliff. Instituting a
carbon tax would make it much easier to deal with our country’s budget
crisis, because it would give us another tool for solving the problem.
And, a carbon tax can get significant reductions in greenhouse gas
pollution. Allen Fawcett presented findings from the Energy Modeling
Forum that show a multitude of technology development scenarios that get
to 50 percent reductions in greenhouse gases with a carbon tax.
Broadly speaking, there are two questions about designing a carbon
tax: how to collect the money, and what to do with the money? Neither
of these is simple, and virtually every option involves tradeoffs.
First, let’s talk about collecting the revenue. Do you want to cover
the entire economy, just the energy sector, or even a smaller subset of
industries? As Rob Williams of Resources for the Future pointed out,
most of the greenhouse gas reductions with a modest carbon tax will come
from the electric power sector, which would seem to indicate that you
could only deal with a small part of the economy and get almost all of
the benefits at much lower political cost. At the other extreme, you
could cover things like agricultural-related methane emissions, although
the mechanics of this are much more complicated.
After deciding how much of the economy to cover, you also need to
decide where to assess the tax, which Jack Calder of the International
Monetary Fund discussed. You can assess the tax very far upstream,
where fossil fuels enter the economy (at the mine mouth or wellhead, for
instance). This is relatively simple and gets at every use of fuels,
but the problem is that it puts a tax on fuels that ultimately don’t get
burned and contribute to climate change. Oil used as a feedstock for
plastics production, for instance, doesn’t add to greenhouse gas
pollution, nor does coal burned in a hypothetical power plant with
carbon capture and storage technology. All things being equal, Calder’s
ultimate recommendation is to make a carbon tax as similar as possible
to our existing tax system, which should minimize administrative
challenges and unintended consequences.
What about complementary policies? That is, what should happen with
the state renewable energy standards, federal incentives, and EPA
regulations after a carbon tax is put in place. While the conventional
wisdom among economists is that these other policies simply make a
carbon tax more expensive, Karen Palmer from Resources for the Future
argued that these policies often deal with externalities – including
positive externalities – that a carbon tax doesn’t fix. And, the lesson
from the acid rain program is that EPA needs to have the authority to
go above and beyond a carbon tax based on up-to-date information about
the costs and benefits of further pollution reductions.
Second, after you collect the revenue, you need to do something with
it. The biggest issue is that a carbon tax is most likely to be
regressive; that is, it has a disproportionate impact on poor people.
Modeling by Aparna Mathur at AEI finds that a $15 carbon tax is
effectively a tax of 3.54 percent of the income of the poorest decile of
the population, but just .63 percent for the wealthiest. Terry Dinan, a
senior advisor at the Congressional Budget Office, has studied seven
different ways to deal with this problem, and found that while there is
no perfect solution, doing some sort of income tax or payroll tax rebate
has a very positive effect.
Of course, once you have a pot of money (which will still be large
even after fixing the regressivity problem), you want to spend the money
wisely. RFF’s Williams proposed three uses: cutting pre-existing
taxes, reducing the deficit, and valuable public spending. In the short
term, it’s worth noting that simply reducing the deficit is probably
not as valuable as spending on infrastructure, including clean energy
infrastructure.
This is just a small sample of the issues that will come up in
designing a carbon tax, and many of these choices don’t have options
that are immediately obvious as being the “best” way to design the
system. But it’s clear that we know the implications of different
policy choices. After yesterday’s conference, no one should ever say
that we don’t know how to design a carbon tax. The bigger issue is that
politicians need to decide what they want a carbon tax to achieve and
then plug in the right policy tools.
And this is where the slowdown begins. Of the standing room only
crowd at AEI, there was almost certainly no consensus on any of the
important questions. Is the primary goal of a carbon tax to reduce the
deficit? Or to offset corporate income tax reductions? Or to raise
money for clean energy investments? Or to simply cut pollution, with
all of the money going back to consumers?
This issue will come to a head in 2013, and Climate Progress and CAP
will have recommendations for building a progressive carbon tax. Be on
the lookout for new work on this issue in the coming weeks.
Richard W. Caperton is Director of Clean Energy Investment at the Center for American Progress.
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