Massive increases in federal spending over the past 10 years have created a $16 trillion deficit. Now policymakers in Washington are looking for "new revenue" to reduce the deficit. One idea that crops up from time to time is some form of a tax on energy. In the past it was a BTU tax, cap-and-trade, and now a "carbon tax." To put it mildly, a carbon tax is a terrible idea.
A carbon tax is a tax on the use of oil, coal, and natural gas. More than 82 percent of total U.S. energy consumption comes from these sources and more than 92 percent of our transportation fuel comes from petroleum.
Some proponents of a carbon tax argue that adding a carbon tax could make our tax system more efficient. They argue that because the income tax is inefficient, swapping part of the income tax with a carbon tax could make the tax system more efficient. This argument, however, is ignorant of the real world economics of a carbon tax.
The best literature on the carbon tax argues that a revenue-neutral carbon tax swap actually makes the tax code more inefficient and would hinder economic growth. In the end, a carbon tax has a smaller base than an income tax and is therefore more distortionary. (For more information on this argument, see the Institute for Energy Research's recent study).
Some argue that a carbon tax wouldn't hurt the economy too much because only a low carbon tax rate would be imposed. But that's assuming the tax rate would remain low, and of course the best historical case study is the imposition of the income tax. When the income tax was created in 1913, the top rate was a seven percent. But by 1918, a mere five years later, the top income tax rate had skyrocketed to 77 percent because increases in federal spending required additional revenues. With today's fiscal realities, a carbon tax would surely increase to help cover the deepening federal budget deficit.
Lastly, some people argue we should impose a carbon tax to address climate change. This argument is almost always disingenuous. Reduction of U.S. carbon dioxide emissions alone cannot have a meaningful impact on global climate. As climate researcher Paul Knappenberger recently explained:
Using assumptions based on the Intergovernmental Panel on Climate Change (IPCC) Assessment Reports, if the U.S. as a whole stopped emitting all carbon dioxide (CO2) emissions immediately, the ultimate impact on projected global temperature rise would be a reduction, or a "savings," of approximately 0.08°C by the year 2050 and 0.17°C by the year 2100—amounts that are, for all intents and purposes, negligible.
Yes. You read that correctly. If America magically reduced our carbon dioxide emissions to zero overnight, the world would be 0.08°C cooler by 2050. The reason is simple—the majority of new carbon dioxide emissions will come from developing countries. A U.S.-only carbon tax would have no noticeable impact on global temperature.
A carbon tax would harm the economy, reduce economic growth, and hinder job creation. At the same time, it would not have any noticeable impact on global temperature. That cost is too great for every American.
About Thomas Pyle President of the Institute for Energy Research
Mark Muro Director of Policy for the Metropolitan Policy Program at Brookings
Chad Stone Chief Economist at the Center on Budget and Policy Priorities
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.
Christopher Prandoni Federal Affairs Manager of Americans for Tax Reform