Discussion of the Carbon Tax Resurfaces as the Fiscal Cliff Looms

As soon as President Obama was elected for a second term, the focus shifted to talk of the fiscal cliff, a mix of deep budget cuts and tax increases set to take effect at the end of the year.  It is estimated by the Congressional Budget Office that the combination of these cuts and tax hikes will cause economic output to shrink by 2.9% in the first half of 2013, followed by a weak second-half rebound of 1.9% growth.  The spending cuts will likely affect several environmental programs, mostly through the 8.2% cuts in “nondefense discretionary funding” expected by the White House.  Potential “victims” of the cuts include the National Park Service, National Oceanic and Atmospheric Administration, Department of Energy, and even the Environmental Protection Agency.

However, discussions over potential solutions to the fiscal cliff also include proposals that would benefit the environment through the implementation of a carbon tax.  In recent months, discussion of the carbon tax has crept back into the fiscal cliff debates after it largely disappeared from national discourse after earlier attempts to implement it failed.  A carbon tax would apply to carbon dioxide and other greenhouse gas emissions or to the inputs like fossil fuels that lead to the emissions.  The Congressional Research Service suggests that a $20 per metric ton tax on carbon emissions would generate about $88 billion of revenue in 2012 and $144 billion by 2020.  These revenues would reduce the 10 year budget deficit by 12% to 50%, based on differing Congressional Budget Office projections.

The carbon tax is not without its problems.  The $20 per ton tax on carbon dioxide could raise gasoline prices by about 20 cents per gallon and slightly increase electric bills.  These higher prices will fall most heavily on lower-income households who spend proportionally more on fuel than higher-income households, thus having the effect of a regressive tax.  The Congressional Research Service considered this issue in a recent report and examined various ways to reduce this disproportionate burden on lower-income households.  For example, if taxes were applied at the beginning of the production process, some of the increased costs could be absorbed earlier in the production process and reduce the ultimate increased cost that is passed on to individual consumers.  This report also includes plans to mitigate against a disproportionate burden being placed on certain industries and minimize economy-wide costs.

The carbon tax could also encourage changes in behavior that could lead to beneficial environmental behavior.  The tax could stimulate innovation and investment in green technologies.  Consumers may also modify their behavior in the marketplace as a result of increased costs by engaging in energy conservation and personal investment in “new lower-emitting technologies.” Carbon tax revenues could then be used as a source of revenue for deficit reduction or to replace existing taxes like payroll or income taxes.

The carbon tax has received bipartisan support in recent months as part of a solution to the fiscal cliff, with increasing endorsement from some moderate Republicans.  Although the tax still remains a long-shot in a deeply-divided Congress, some analysts predict the tax would garner more support if it were touted as a source of new revenue rather than as a way to combat global warming.  As support grows, the U.S. Treasury is funding a carbon tax analysis to determine how the tax code can be used to cut greenhouse gas emissions. It is yet to be seen if the carbon tax will make its way into a solution to the fiscal cliff, but it is likely to remain a topic of debate for some time to come.

Written by Sarah Harmon, GIELR staff