A Carbon Tax Is Smart Energy and Budget Policy

A carbon tax or similar policy is not a radical left-wing idea.

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Chad Stone is chief economist at the Center on Budget and Policy Priorities.

Policymakers who are serious about addressing the nation’s long-term fiscal problems should look closely at the merits of “putting a price on carbon.” A carbon tax or similar policy is a “two-fer” that would give businesses and households a better price signal to guide their decisions about energy use, and that would raise revenue to reduce the budget deficit.

This is not a radical left-wing idea. As Harvard professor N. Gregory Mankiw, former chairman of President George W. Bush’s Council of Economic Advisers and current adviser to presidential candidate Mitt Romney, wrote in a 2007 New York Times op-ed:

In the debate over global climate change, there is a yawning gap that needs to be bridged. The gap is not between environmentalists and industrialists, or between Democrats and Republicans. It is between policy wonks and political consultants.

Among policy wonks like me, there is a broad consensus. The scientists tell us that world temperatures are rising because humans are emitting carbon into the atmosphere. Basic economics tells us that when you tax something, you normally get less of it. So if we want to reduce global emissions of carbon, we need a global carbon tax. Q.E.D.

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Mankiw is not alone among prominent economists who advise Republican politicians to recognize the merits of a carbon tax. (See Douglas Holtz-Eakin and Kevin Hassett.)

To be sure, these economists do not endorse the use of a carbon tax to reduce the budget deficit. Party orthodoxy requires opposition to any tax increases, so maybe we should call it a carbon “fee.” These supporters typically call for using carbon fee revenues (which could be $100 billion a year or more) to finance cuts in corporate or individual income tax rates, based on standard tax reform arguments about how, all other things equal, a broader tax base and lower rates are preferable to higher rates and a narrower base.

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The problem, of course, is that all other things are not equal. As my colleagues at the Center on Budget and Policy Priorities have shown in their analysis of the budget proposal of House Budget Committee Chairman Paul Ryan, balancing the budget with spending cuts alone requires truly draconian measures. Holding federal government expenditures to historical averages is unrealistic in the face of a graying population and continued demands on the government for defense, homeland security, veterans’ care, infrastructure, and other needs. Revenues must be part of any credible, sustainable, and bipartisan solution to our long-term deficit problems, as they have been in the past.

A second important consideration is fairness. Like cuts in marginal tax rates, a carbon fee is regressive. Low income households spend a larger share of their income on energy and energy-related products, whose prices would rise with a carbon fee. That’s why a low income rebate was an essential feature of the climate change bills that Congress debated in 2009 and 2010. The longstanding principle that deficit reduction should not increase hardship among the most vulnerable requires that if a comprehensive deficit reduction package includes a carbon fee it should provide equivalent protection for low income households.

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