Carbon Taxes Cut Debt, Cool Planet
Absent some profound shift in our penchant for burning coal, oil and gas, the Earth is expected to warm as much as 11.5 degrees Fahrenheit over the next 100 years, causing more weather-related destruction.
It’s only responsible to force a shift away from fossil fuels by enacting a carbon tax. The U.S., which accounts for about 19 percent of global emissions today, should take the lead in doing so as part of broader tax reform.
The benefits of such a tax are clear: It would raise immediate revenue for a strapped nation, curtail the use of fossil fuels and, as a result, drastically lower emissions. A carbon tax of $15 a ton that rises at 4 percent above inflation annually would raise $310 billion by 2050 and cut emissions 34 percent (or 2.5 billion metric tons), according to a recent report by the Brookings Institution. The biggest hit would come from gas prices, which would initially rise by about 13 cents a gallon and increase gradually from there, according to other estimates.
To avoid one of the biggest downsides of a carbon tax -- slower economic growth -- as much as 50 percent of the revenue should be used to lower corporate tax rates for all companies. Such an offset could boost economic output by giving business a bigger incentive to invest and hire, research by Brookings and others shows. The remaining revenue should be used to help reduce the federal deficit and make the tax code more progressive, easing some of the bite from higher electricity and gas prices.
The basic concept of a carbon tax enjoys support from a majority of Americans, including many Republicans. Former Representative Bob Inglis, a South Carolina Republican, recently started a think tank to build support for a carbon tax, and the conservative American Enterprise Institute has joined Brookings and the International Monetary Fund in an initiative to explore one. Greg Mankiw of Harvard University and Glenn Hubbard of Columbia University, two top economic advisers to presumptive Republican presidential nominee Mitt Romney, have been vocal proponents, along with Arthur Laffer, a former economic adviser to President Ronald Reagan.
The economic case is compelling: Climate change is the “greatest market failure the world has ever seen,” as former World Bank economist Nicholas Stern put it, because the hefty environmental costs from burning fossil fuels are borne by society, not by those who emit greenhouse gases. With no economic reason to limit pollution, there’s every incentive to overproduce. So-called Pigovian taxes -- carbon taxes and cigarette taxes, for example -- raise the price of things that drive up costs to society.
There’s no longer any doubt that rising carbon-dioxide levels are tied to temperature increases. Since the Industrial Revolution, atmospheric concentrations of carbon dioxide have increased roughly 35 percent, and the Earth and ocean surface have warmed accordingly. Even climate skeptics recently confirmed a solid link between carbon emissions and a warmer climate. And just last week, an analysis of worldwide temperatures over the past 60 years found that the growing warmth is responsible for extreme heat waves like those in Texas and Oklahoma last year.
To understand the danger look no further than the Plains states, where a crippling drought is withering corn, soybeans and other crops. The U.S. Agriculture Department has declared more than half the counties in the U.S. natural-disaster areas, allowing them access to federal aid.
Further economic fallout will come in the form of record crop-insurance payments to drought-stricken farmers, which this year will exceed government-subsidized premiums for the first time since 2002, according to a Bloomberg Government . U.S. property and casualty insurers have seen catastrophe-related losses soar. The Congressional Budget Office warned that warming of 7 degrees by 2100 could lower gross domestic product by 3 percent and an 11 degree increase could result in a 5 percent hit to U.S. GDP and a 10 percent loss in global output.
Enacting a stand-alone carbon tax has long been difficult because of competing political views about how best to structure one, and because of opposition from lawmakers in coal states, which produce and consume more carbon and would be harder hit by a tax. Regional resistance may abate somewhat given the abundance of natural gas, which burns cleaner and is slowly replacing coal.
Congress’s now urgent need to address expiring federal-tax breaks, automatic spending cuts and the debt ceiling may offer an opportunity for some type of broad tax reform. A carbon tax could be a crucial piece of a simpler, pro-growth tax system that lowers rates for corporations and individuals while also reducing the federal deficit.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.