“With the United States facing the expiration of a slew of tax cuts in 2013—the dread “fiscal cliff”—there has been plenty of interest in offbeat tax-reform proposals. And one idea that a few economists keep knocking around is a fee on carbon emissions. After all, if we need to raise revenue, why not just tax global-warming pollution?“
Because it isn’t taxing “pollution” but abundant affordable energy. That and it won’t do a damned thing to “address global warming”.
A new paper from the MIT Global Change Institute lays out how a carbon tax might work in practice. The authors model what would happen if, this December, Congress enacted a small fee on carbon emissions to fend off a portion of the tax hikes and spending cuts that are scheduled to occur. The carbon tax would be levied directly on fossil fuels—on coal that comes out of the mine, say, or oil that’s shipped in from overseas—and would start at $20 per ton of carbon in 2013, rising 4 percent each year thereafter.
The authors, Sebastian Rausch and John M. Reilly, estimate that this tax would raise $1.5 trillion over the next 10 years. If that revenue were then used either to cut income taxes, reduce payroll taxes, or deflect cuts to social-spending programs, the MIT authors find, most Americans would be slightly better off than if Congress simply let the fiscal cliff hit, with the Bush tax cuts and payroll tax cuts expiring automatically. (Using the carbon tax in this way would lead to an 0.02 percent bump in consumption and leisure over time.)
Now, the betting line is that Congress will do something to avert the looming tax hikes and spending cuts, so this isn’t a terribly realistic scenario. Implementing a carbon tax next year would still hurt the economy—it would just hurt slightly less than the fiscal cliff. Still, the broader point of the MIT analysis is to suggest that a carbon tax could be a more economically beneficial way of raising revenue than, say, payroll or income taxes. So even if Congress waited until 2014 or 2015 or whenever the U.S. economy has recovered, replacing other taxes with a carbon tax could still provide a minor economic boost (see the first graph below).
A carbon fee usually gets criticized for hurting poorer Americans the most—they spend the biggest slice of their income on gasoline and other energy-intensive products, after all. But Rausch and Reilly found that a lot of the distributional effects depend on what Congress does with the revenue, as shown in the chart below:
Does anyone trust a politician with a bucket of money?