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Carbon Tax, Demystified

by Greg Hanscom

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The notion of creating a carbon tax in the U.S. refuses to die — maybe because it’s a creative idea that also holds some appeal across the ideological spectrum. It’s a practical scheme to alleviate global warming — and it’s market-based! Here are some answers to the carbon-tax questions we know you have.

What the heck is a carbon tax?
Simple: It’s a tax on carbon dioxide (CO2) huffed into the atmosphere when we burn coal, oil, natural gas, gasoline, and any other carbon-based fuel. CO2 is the biggest contributor to climate change, and putting a tax on it is one way to encourage people to spew a little less of it.

There are different ways to structure these taxes, but the generally accepted method is to collect them at the source: The coal company or the oil company pays based on the amount of CO2 their product will create.

The idea has been slow to catch on (what about our response to climate change hasn’t?). But there are currently carbon taxes in Sweden, Canada, Boulder, Colo., San Francisco, and other foreign lands. (The Carbon Tax Center has a full rundown.) And there’s been talk recently of trying to get one passed for the entire U.S.

Wouldn’t this raise the price of gas, jack up my electric bill, and otherwise make my life miserable?
Yes, yes, and hopefully no. If oil, gas, and coal companies pay by the ton for the carbon their products will create, they will no doubt pass those costs on to their customers. Economists Ian Parry and Roberton Williams estimate that a tax of $33 per ton of carbon dioxide would add about 25 cents to a gallon of gas and a couple cents to a kilowatt-hour of electricity.

But supporters of carbon taxes point out that we already pay for all that polluting — in doctor’s visits when our kids have asthma triggered by air pollution, for example, and in the million-and-one escalating costs of global warming. A carbon tax, then, is just one way of attaching the costs — and the associated disincentives — to the thing that is creating them.

Designed correctly, a carbon tax could therefore make our lives better, as the wonders of the free market create all manner of new gadgetry to get us around, heat and cool our homes, and the like, without burning all those fossil fuels.

What would the government do with all that money?
Here’s the fun part. Those who support a carbon tax want to take all the money that’s collected and … wait for it … give it to us, either by reducing other taxes (i.e. income tax) or just writing us monthly dividend checks. We can then take the money and either 1. continue to fill up the tank with more expensive gasoline, or 2. find a less expensive way to get to the grocery store.

Critics are skeptical that this money would actually find its way into people’s hands, but that is what proponents mean when they say that a carbon tax would be “revenue neutral.” And even conservative economists point out that this would have the added benefit of shifting taxes from things we’d like to have more of (i.e., income) to things we could do with less of (i.e., pollution).

Who likes carbon taxes and who doesn’t?
OK, this is where things go a little haywire. As I say, there’s something here for everyone to hate. But there’s also something that most everyone likes.
Environmentalists point out that a carbon tax would not, by itself, solve the climate crisis. Some read that to mean that we shouldn’t bother (incidentally, some folks who doubt the seriousness of climate change say the same thing), but most say it would be a step in the right direction.

U.S. Republicans despise them (either because they deny that climate change is happening or because carbon taxes include the T word) except when they don’t. Former U.S. Rep. Bob Inglis, a Republican from South Carolina, has launched the Energy & Enterprise Initiative to promote conservative solutions to global warming — chief among them a carbon tax. He calls a carbon tax the “free-enterprise” solution to global warming, arguing that it would spur the creation of “the fuels of the future.”

Most Democrats have been mum about climate change solutions since their cap-and-trade bill got a drubbing in 2010. (Cap-and-trade is a different approach under which the government puts a ceiling on the total carbon emissions allowed and then sets up a marketplace for polluters to trade the right to produce them.) But if and when the topic surfaces again in Washington, a carbon tax will likely be toward the top of the Democrats’ list of remedies.

Even ExxonMobil — a company whose longtime CEO famously denied the plausibility of human-caused climate change – supported a carbon tax in 2009. Why? Because the company saw some sort of price on carbon as inevitable, and a tax seemed preferable to the cap-and-trade program that was up for discussion at the time.

Could we see a carbon tax in the U.S.?
Chances of a carbon tax passing through the current U.S. Congress are negligible. (Show me a U.S. politician who is willing to utter both the C word and the T word in the same sentence, and I will show you someone whose political career is nearing its end — or already over. However, given the rising urgency of global warming, a carbon tax could certainly be considered, what with its free-market appeal.

There is also the matter of the “fiscal cliff” that we’re headed for when a slew of tax cuts expire at the end of 2013. MIT researchers Sebastian Rausch and John M. Reilly argue that a carbon tax could help avert economic catastrophe in America.





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