Could carbon tax prevent dramatic climate change?
In recent days, President Obama has painted the risks of climate change in apocalyptic terms. Speaking in Anchorage, AK on Monday, Obama warned that without quick action to slow or reverse global warming, "entire nations will find themselves under severe, severe problems: More drought. More floods. Rising sea levels. Greater migration. More refugees. More scarcity. More conflict.”
Yet for all his tough rhetoric, Obama’s own policy proposals are rather modest. After failing to convince Congress to enact a “cap and trade” system to limit carbon emissions, Obama has increasingly relied on a regulatory approach such as his recently-announced limits on use of fossil fuels by power plants.
Predictably, those regulations attracted a wave of political criticism and legal challenges. But they also gave states flexibility to limit emissions through a carbon tax or by a carbon trading system. While congressional Republicans rejected the trading model when Obama proposed it, many conservative thinkers like the idea and some governors may be willing to experiment with it.
What about a carbon tax? That’s harder to see, at least for now. After all, Congress can’t even pass a modest hike in the gasoline tax to fund the busted Highway Trust Fund. And Obama, for all his talk about the importance of both infrastructure improvements and climate change, won’t publicly back a small gas tax increase either.
A broad-based carbon tax has far more support among academic economists and think-tankers than politicians. But despite its political problems, such a levy has important benefits. Reducing demand for carbon fuels by directly raising their price is simpler and far more efficient than regulatory curbs. Some of the revenue generated by such a tax could be used to cushion the economic blow suffered by low-income households as well as coal mining communities. Extra revenue could be used to reduce individual or payroll tax rates, help finance corporate tax reform, or trim the budget deficit.
My Tax Policy Center colleagues have written several recent papers about a carbon tax. Donald Marron, Eric Toder, and Lydia Austin recently penned a helpful primer on the opportunities and challenges in taxing carbon. Eric and Donald combed out some of the more technical tax policy issues here and looked at how a carbon tax could be a key element in corporate tax reform here. Bill Gale, Samuel Brown, and Fernando Saltiel discussed the fiscal benefits of a carbon tax here. And here is a nice paper by Adele Morris and co-authors that compares a carbon tax with an approach that allows trading emissions for credits.
If you believe that man-made climate change is a figment of fevered left-wing imaginations, there is no problem to fix. But if you are anyone else, you can look to technology and one of three policy solutions to the problem: We can reduce emissions by taxing them directly, by taxing them indirectly through regulation, or by some combination of both. Given the limitations and inefficiencies of a pure regulatory approach, it is hard to imagine that a carbon tax or a related carbon trading model won’t play some role in future climate change policy.
