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Can America solve its fiscal cliff with a carbon tax? Probably not

Waterfall 11082012
Getty Images / Peter Adams
If you combine the fiscal cliff with global warming, you get the global fiscal waterfall.
  • Tim Fernholz
By Tim Fernholz

Senior reporter

Published Last updated This article is more than 2 years old.

The experience of Hurricane Sandy has put climate change back on the map for many Americans who’d rather forget about the thorny problem. The on-rushing fiscal cliff requires a budget fix. What if an enterprising legislator proposed killing two birds with one stone, launching a levy on carbon that would help reduce C02 emissions while raising money for federal coffers?

It could raise all the money itself. Economics blogger Brad Plumer finds an MIT report that explains how a tax of $20 per ton on carbon in fossil fuels would work to raise revenues, though it wouldn’t be sufficient in itself to meet US emissions targets:

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.)

Or play a smaller part in the deal. HSBC released an analyst report that’s bullish on the idea.

Setting up a new carbon tax program for the entire economy is complex. One approach would be to begin with the electric generation sector only, since it is already subject to other emissions programs, and already has a robust tracking system in place. Such a program beginning in 2018 could raise $116 billion by 2020; the same program beginning theoretically in 2014, due to the urgency of the fiscal situation, could raise $301 billion by 2020 (based on a $20/ton carbon price escalating at 5% per year.) By 2020, carbon emissions in the sector could be 25% lower than 2005 levels.

It could attract votes from both parties. Matt Yglesias writes that unlike a lot of centrist ideas, a carbon tax proposal cuts across America’s political coalitions in a meaningful way:

This is the grand bargain that actually makes sense—a proposal that would divide both parties’ core coalitions. Fossil fuel interests wouldn’t like it, but it’s very favorable to the generic rich person. Populist Midwestern Democrats would hate it, but coastal liberals would like it—a plan like that wouldn’t fully address the climate crisis by any means, but it would be a huge step forward.

What’s the problem? There’s probably not enough time to build consensus on the issue, which is more popular outside Congress than inside it. While many right-leaning economists endorse carbon taxes as a more efficient way to raise revenue, most conservative members of Congress remain firmly opposed to both tax increases and recognizing the importance of global warming. As Americans saw during the 2009 debate over “cap and trade,” a more complex plan to limit carbon emissions, fossil fuel interests have a powerful voice in Washington, and many liberal groups are concerned about how the harshly a regressive carbon tax impacts low-income people. There’s just a lot to work out, which means that if a tax on carbon comes into play, it will be part of a longer-term solution, not what, if anything, the government does before Jan 1. 2013.

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