The carbon tax is a "two-fer" that would give businesses and households a better price signal to guide their decisions about energy use and raise revenue as part of a balanced deficit-reduction package. So, if you think that we should address the environmental damage caused by greenhouse gas pollution, and if you think that revenues have to be part of any sustainable agreement to stabilize deficits and debt, the carbon tax is a good idea.
A carbon tax is not most people's first choice (except among economists). Fear of the "tax" label was surely one reason why policymakers pursued "cap-and-trade" in their initial efforts to address greenhouse gas pollution. Many environmentalists are not as confident as economists that businesses and households would change their behavior sufficiently under a tax to make a difference; they prefer the certainty about the amount of emissions reductions that a cap seems to provide. But a cap has its own uncertainty—namely, how costly it might be to keep emissions under the cap.
The decisive advantage of the carbon tax, however, is that it is starting to get into the conversation, while cap-and-trade is not.
Most carbon tax advocates want to use the revenues not for deficit reduction but instead to cut other tax rates judged to be more costly to the economy, fund energy efficiency investments, or provide rebates to consumers that offset the higher energy prices. We at the Center on Budget and Policy Priorities, for example, think it's very important that policies to reduce greenhouse gas emissions don't impose additional hardships on the poor or drive more people into poverty; we have worked hard to ensure that climate legislation includes robust protections for low income people.
Adjudicating these competing claims in a stand-alone carbon tax bill would be very difficult and deficit reduction could well get short shrift. But in a larger deficit-reduction deal, the dynamic could be different. Carbon tax revenues would not be earmarked to specific purposes, so some policymakers could embrace a carbon tax in the belief that it allowed more significant tax reform than otherwise would have been possible, while others could adopt it as a way to protect entitlement programs.
There is little evidence that the carbon tax is on budget negotiators' radar screens yet. But maybe it should be.
About Chad Stone Chief Economist at the Center on Budget and Policy Priorities
Mark Muro Director of Policy for the Metropolitan Policy Program at Brookings
Charles Komanoff Director of the Carbon Tax Center
Paul C. Knappenberger Assistant Director of the Center for the Study of Science at the Cato Institute.
Thomas Pyle President of the Institute for Energy Research
Christopher Prandoni Federal Affairs Manager of Americans for Tax Reform