Editorial Board

Congress, Pay Attention to This Carbon Tax Bill

Photographer: David McNew/Getty Images

The challenge to prevent climate change is daunting for its scale. How can society change human behavior widely enough to stop the accumulation of atmosphere-warming gases -- without swelling the government or ruining the economy?

That's why a bill introduced Wednesday in Congress is important, even if its odds of becoming law in the current Congress are slim. The legislation, sponsored by Democratic Senators Sheldon Whitehouse of Rhode Island and Brian Schatz of Hawaii, would impose a tax on almost every ton of carbon emitted in the U.S., with the revenue going back to the public through tax breaks and other rebates.

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The tax would be set at $45 per ton, and it would rise each year at the rate of inflation plus 2 percent until U.S. emissions fall by 80 percent. That dollar figure wasn't picked at random; it reflects the federal government's estimate of the so-called social cost of carbon -- the damage done to human health, buildings and infrastructure, and agricultural productivity by the higher temperatures, more extreme weather and rising sea levels caused by climate change.

At that level of taxation, emissions could be reduced 40 percent by 2025, compared with 2005, Whitehouse and Schatz say. That would be a far greater reduction than the 26 to 28 percent promised by the Barack Obama administration's regulatory changes over the same period. It would also amount to a deeper cut than what other countries have proposed, making the U.S. a world leader in fighting climate change.

The proposal also deals with common objections to a carbon tax. The first is that it would put U.S. companies at a disadvantage against foreign competitors by raising the cost of their products. So the bill would levy tariffs on imports from countries with no carbon price, and refund the tax for American goods exported to those countries.

A second objection is that the added revenue would encourage government to expand. To avoid that, Whitehouse and Schatz propose using one-third of the money to offset cutting the top corporate tax rate to 29 percent from 35 percent, and sending the rest to workers (through a $500 refundable credit on payroll taxes), retirees and veterans (through a $500 annual payment), and states (subsidies for rural and low-income households). The goal is to ensure that Americans and companies widely share in the revenue.

So far, so good, but the proposed tax has a few problems, too. Calculating the social cost of carbon is hard, and even if $45 is the right number, it may be so high as to cause a level of disruption that businesses will struggle with -- especially if it's not phased in over several years, as British Columbia did with its carbon tax.

Another concern is that even though U.S. companies would be protected against cheaper foreign imports, American consumers would suffer as those imports became more expensive. Meanwhile, developing countries would suffer as their exports became more expensive for Americans to buy. These are significant costs that can't simply be overlooked.

Finally, using part of the revenue to cut corporate taxes may be a good way to win support from Republicans, but that doesn't make it good policy. Because the brunt of the carbon tax would be borne by households in the form of higher prices, using the revenue to lower corporate taxes would amount to a tax transfer from people to companies. An ideal law would distribute the benefits more fairly according to the costs.

These are points to negotiate and debate, not easy but essential to address. The crucial point is that Congress has before it legislation that would cut emissions and still protect American competitiveness. Lawmakers seeking an effective alternative to Obama's regulatory approach to climate change but worried about the growing cost of inaction should give the bill the attention and improvement it deserves. 

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.