Carbon Taxation: A Cost-Effective Tool To Reduce The Risks Of Climate Change
Business leaders, environmental groups, and economic experts have long considered a carbon tax (or price) to be the best, most cost-effective way to respond to the risks of climate change. This approach is now receiving increasing support from political leadership– even from congressional Republicans. This support is a welcome and necessary development that can put the U.S. on the right path towards finally enacting long-standing and ambitious climate policy.
The downside to this increased momentum is the inevitable activation of carbon tax opponents. Their message, simply put, is that a carbon tax would increase the cost of goods, the total tax burden felt by American families, and the power of government in Americans’ lives. Though worthy of consideration, the costs of carbon tax are often overstated, and the ways that policy can reduce those costs are ignored.
The fundamental nature of a carbon tax is to increase the cost of emitting carbon pollution, so that consumers and businesses can efficiently move toward cleaner options. Increasing relative prices for high-carbon energy sources and goods will direct consumer behavior away from carbon-emitting energy and drive investment toward carbon-free alternatives–a concept that has been embraced by economists across the political spectrum.
The question is: does a carbon tax result in a fair bargain for Americans, or does paying to pollute impose unfair costs on consumers?
Let’s start by examining an actual proposal. Last year, three members of the House of Representatives supported the Market Choice Act, a bill that would impose a carbon tax strong enough to reduce CO2 emissions by 29 percent from 2005 levels in the next ten years—while eliminating the federal gas tax—to pay for modernizing infrastructure with upward of one trillion dollars in revenue. Among other measures, the bill dedicated ten percent of that revenue to state-block grants to help households with lower incomes manage higher energy prices. Economic analysis shows that those lower income households, because of lower fuel taxes and rebates, would benefit under such a program.
The same analysis finds that average energy expenditures would increase by about $275 per capita–a new tax burden on the lower side of the tariffs recently leveraged on imports (estimated to be between $210 to $427 per capita). With a modest amount of revenue set aside to help the poorest households and to invest in clean energy R&D, such a carbon tax would cost the average American roughly the same amount as the recent import tariffs–but with new infrastructure and a real climate policy as a result.
What’s more, a recent analysis from the Center on Global Energy Policy shows that fully rebating carbon tax revenues back to households would not only compensate low-income households for the increase in energy expenditures, but would also result in the poorest households having their total tax burden reduced by 4-5 percent of pre-tax income. Everyone from the lowest income earners to middle income earners would come out ahead.
Rebating is not the only way to reduce Americans’ total tax burden in the course of levying a carbon tax. A 2017 Treasury Department paper found that using the revenue from a carbon tax to reduce the payroll tax rate would increase the after-tax income of most middle-income earners–with only the top of the income distribution (top 1 percent) experiencing a decrease in after-tax income greater than 0.5 percent.
Keeping all of these positive scenarios in mind, it’s clear that opponents of carbon taxes misconstrue its financial burdens on average Americans. A particularly hyperbolic example is recent video from Competitive Enterprise Institute, which characterizes a carbon tax as a “scheme to tax virtually all aspects of our lives” and likens it to a tax on breathing. As mentioned earlier, a moderate carbon tax would see energy expenditures rise, but other consumption goods, such as food, clothing, and other household items, would increase by less than 1 percent on average. Accounting for the transfer payments that are indexed to the price of these consumption goods shows that carbon taxes are not regressive, meaning that poor households are not disportionately burdened by the tax.
The growing support for a substantive and carefully designed carbon tax has come as more and more people realize that it will help future generations, without imposing unfair costs on this one. There will certainly be tradeoffs and costs to consider along the way–but as long as Congress continues to take the idea of a carbon tax seriously, there is substantial reason to be optimistic about the future of climate policy.