Lower Emissions and Lower Taxes?

Offset a carbon tax with other tax cuts to achieve bipartisan goals

The best way to reduce emissions of greenhouse gases is to put a tax on carbon. Almost all economists would agree on this, yet in the U.S. it’s assumed the idea will always be unpopular. Smartly framed, however, a carbon tax has a fighting chance of success. And here’s how: Dedicate all the revenue, not just some, to cutting other taxes.

Granted, some Republicans oppose a carbon tax merely because it recognizes climate change as a problem requiring action. There’s nothing one can do to persuade this group. Many more Republicans oppose a carbon tax because it’s a tax. For this latter group, at least, the argument can be recast: The idea is not so much to impose a new tax as it is to reduce government intervention in the economy.

Instead of listing all the fine things a carbon tax could buy—a tax cut here, a budget reduction there—advocates should simply offer to give back the revenue in the form of tax cuts elsewhere. It’s a worthwhile trade, because a tax is by far the best way to reduce carbon emissions. Consider the proposal by Adele Morris of the Brookings Institution: a modest levy of $16 a ton on carbon dioxide, rising at 4 percent a year above inflation. It would reduce power-sector emissions by more than the recent EPA proposals and curb emissions across the rest of the economy as well.

A $16-a-ton tax would add about 16¢ to the price of a gallon of gasoline and raise household energy costs by 5 percent to 20 percent, depending on the source. Such costs are most often cited by opponents of the tax. Yes, families and businesses would be paying a new tax. But no, they would not be paying more tax. The new carbon tax would raise about $1 trillion over 10 years and almost $3 trillion over 20—a handy sum. That would be enough to send every U.S. resident a check for about $300 (or $1,200 for a family of four) in the first year, with bigger checks to follow. It would be more than enough to cut the corporate tax rate to 28 percent from 35 percent, for instance, or take a bite out of payroll taxes, or some of both.

This windfall would lead to an argument about what taxes to cut. At which point, admittedly, the debate could bog down all over again. But at least it would be framed by a shared assumption: that a carbon tax is good policy. It gets liberals a more effective climate policy, and Republicans a less intrusive government.


    To read Francis Wilkinson on Reagan’s power over the GOP and Margaret Carlson on the midterms, go to: Bloomberg.com/view.

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