Recurring and worsening climate disasters make painfully clear that the world has just a few decades, if that, to leave carbon-based energy behind. But no modern economy can do that unless prices of fuels tell the truth about the climate damage they cause. This is best done by aggressively taxing the carbon content of coal, oil, and natural gas, with the levies placed "upstream" where the fuels are taken from the ground.
That's a carbon tax: straightforward, transparent, no gimmicks, no loopholes. Unlike cap-and-trade, a carbon tax creates no new markets; rather, it embeds price signals in existing fuel markets that will spur innovation and reward the rapid uptake of clean energy. Moreover, making the tax revenue-neutral will prevent it from adding to the size of government.
With the anti-science far right losing traction in Washington, and with the nation reeling from "extreme weather" events like the 2011-2012 droughts and the recent Superstorm Sandy, Americans appear ready for climate action. Fortuitously, a carbon tax is perfectly suited to handle an overlooked but key piece of the "fiscal cliff"—the impending expiration of the two-year payroll tax "holiday."
The Carbon Tax Center estimates that a carbon tax pegged at just $18 per ton of carbon dioxide would generate $95 billion a year—enough to pay to extend the payroll tax holiday beyond its December 31 expiration and thereby help keep the fragile economic recovery from imploding. That tax is relatively small (equivalent to 17 cents on a gallon of gas and just under a penny per kilowatt-hour of electricity), so its climate impact would be modest. But the reductions in carbon emissions will cascade if the tax is ramped up, year by year; indeed, the mere expectation of rising prices for coal, oil, and gas will go far to drive an across-the-board transition to renewable and efficient energy.
To protect energy-intensive industries, carbon tax legislation should include "border tax adjustments" on imports, pegged to their untaxed carbon contents. These tariffs will incentivize our trading partners to impose their own carbon taxes so that the tax revenues flow to them, not the U.S. Treasury.
A carbon tax is so necessary and manageable that its adoption isn't a matter of "if" but of "when." The time has never been more right. It's up to Congress and the president to seize it.
About Charles Komanoff Director of the Carbon Tax Center
Mark Muro Director of Policy for the Metropolitan Policy Program at Brookings
Chad Stone Chief Economist at the Center on Budget and Policy Priorities
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