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Cornucopia of Prosperity Can Flow From Carbon Tax

Craig A. Severance, Energy Economy Online
Right now the climate and energy community is stuck. There is a growing consensus, including among conservatives, that it is finally time for a carbon tax. Yet, no politician — especially President Obama — seems ready to advance the proposal.

The previous proposal to do something about climate — cap&trade — failed to gain wildly popular public enthusiasm (and we need this level of support). While economists thought cap&trade was the best way to address the carbon pollution that is causing extreme climate disruption, it wasn’t seen as "giving back" enough to the public.

We Need Work not Wonk. A recent American Enterprise Institute conference on a carbon tax showed broad support for the idea among both Republicans and Democrats…However, the conference showed how quickly the discussion can fall into a "wonky" technical morass of various ways to carry out a carbon tax…

To gain wildly enthusiastic public support, we must first discuss the economic prosperity that can flow from a carbon tax…

Fortunately, this won’t be hard.

Top 10 Ways Economic Prosperity Can Flow From Carbon Tax:

Depending on the level of tax placed on carbon and the amount of revenues thus raised, the following "Top 10" benefits can flow to the public:

10. Spur New Automobile Buying. With higher prices at the pump, people want more fuel efficient vehicles. One fair use of some of the funds from a carbon tax would be an improved "Cash for Clunkers" program, basing cash rebates on percentage improvement in fuel economy. This will create auto industry jobs, and get efficient cars on the roads faster.

9. Build Needed Projects. Another fair use of carbon tax revenues is to repair, and to prevent, damages from extreme weather events. While pundits have said GDP may now rise with rebuilding from Superstorm Sandy, where are the tens of billions of dollars needed? Coastal areas also now want to prevent damage from future climate disasters. Seawalls, levees and other structures are needed just to protect against the global warming we’ve already "baked in". On the positive side, communities will use rail projects to help us prosper without burning so much oil. With these projects, plus private utility spending to convert electric generation to renewable energy, construction jobs will be a major benefit flowing from action on the climate.

8. Better Buildings Soon. People want to live and work in more comfortable and energy efficient buildings, but most Americans are too "maxed out" and underwater to finance the needed energy improvements. Block grants of billions of dollars in "seed funds" to states can help them set up revolving-fund special assessment districts to finance energy efficiency and renewable projects. Because the loans are repaid by energy savings, only initial seed funding would be needed. This same Federal seed funding can be used to encourage (instead of failed attempts to require) states to pass strict energy building codes for new construction. For instance, if a state agrees to pass a strict energy code on new buildings, its amount of seed funding for retrofits would be quadrupled. Putting money in the hands of building owners to do needed energy work can be a major tool for job creation in local communities across America.

7. Raise Revenue and Break the Debt Junkee Habit. For the past several years, about one-third of the total "Want-List" funded by the Federal government has been paid with borrowed money. New revenue is needed, but of course everyone wants a tax that can be "paid by the other guy". A carbon tax fits this, because it offers everyone the option to avoid paying it by changing their behavior. Yet, according to the Brookings Institution, even a very modest carbon tax could raise an average over 10 years of about $150 billion per year, while cutting carbon emissions significantly. (Funding this full "Top Ten" list would require a somewhat more serious carbon tax, but also includes more economic benefits.) An energy and climate plan would also reduce our trade deficit — by cutting oil imports and making U.S. manufacturers more competitive — and thus keep more dollars circulating in the U.S. economy, where they are taxed.

6. Stimulus Effect Now. In the "Magic Math" of Washington, a new proposal is not considered to add to the Federal Deficit so long as it pays for itself over the next 10 years. In other words, an overall proposal, such as these Top Ten Ways, could be structured to provide a "Stimulus Effect" right now. Yet it can still be Budget Neutral so long as it pays for itself over 10 years. Unlike the usual Washington smoke-and-mirrors that depend on outrageous assumptions about growth and other tricks, a carbon tax actually would be set to increase annually and thus could finance a stimulus effect now but truly be balanced over a 10 year period.

5. Help U.S. Manufacturers Compete. If the carbon tax is properly structured, imported products will also be assessed based upon the carbon pollutants used in their manufacture and the fuel used to get them to American borders. This assessment on imports will help U.S. manufacturers compete against Chinese and other imports using dirty coal to make them, and barrels of oil to get them here. It will also cut global carbon pollution, as much of the pollution by exporting nations is not for their own use but to ship us products.

4. Give Employers a Tax Break. To gain the support of business, a major tax break should be given to employers, to make it easier to hire U.S. workers. Extend the "Payroll Tax Holiday" to include the employer’s share of payroll taxes, not just the employee’s share. Because this is laser focused on jobs, this "employer-friendly" tax break should take priority over cutting tax rates on corporate profits — profits often obtained by slashing workers.

3. Extend the Payroll Tax Holiday on Wages. Giving back revenues collected from the carbon tax with every paycheck, the current Payroll Tax Holiday of 2% of wages for the employee share of Social Security Taxes should be extended, adding about $1,000 a year to the average family’s take-home pay. We can thus achieve a long sought goal of conservatives — using taxes on consumption (of a pollutant) to fund a tax break on earnings. To be anti-regressive, the tax break has to be on payroll taxes, because unlike income tax, payroll taxes are paid by even the poorest of workers. Cutting Social Security taxes naturally raises concerns over the solvency of Social Security, but because this Payroll Tax Holiday would now be funded, it could be structured so as not to affect the program.

2. JOBS, JOBS, JOBS. All the benefits in the Top Ten Ways will flow out to create more jobs. Auto industry jobs, construction jobs, energy efficiency and renewable energy jobs (industries more job-intensive than the fossil fuels they would replace), railroad and mass transit jobs, and jobs throughout the economy when employers and wage earners spend their extra cash, will all put Americans to work. A more effective package of measures for job creation would be hard to imagine.


1. Fight Global Warming! Global warming is showing us the true cost of "cheap energy" from coal and other fossil fuels. If we don’t do something about this, we will keep getting slammed by superstorms, droughts, floods, sea level rise, mass extinctions, wildfires, and crop failures. Aren’t we sick of extreme climate disruption already?? Can we really take more of this without doing something about it!? …
(19 November 2012)

Beyond carbon policy: A national feed-in tariff

Chris Nelder, Smart Planet
Climate hawks are hopeful that the U.S. will finally take action on carbon emissions in the aftermath of Superstorm Sandy and the President’s acceptance speech comment that “We want our children to live in an America that. . . isn’t threatened by the destructive power of a warming planet.”

Unfortunately, they’re trotting out the same tired old policy prescriptions that have failed in the past.

I think I have a better idea.

But first let’s review why carbon policy has failed.

Why carbon policy fails
Cap-and-trade, cap-and-tax, and carbon taxes all try to clamp down on carbon emissions. This makes sense when you “do the math” on the warming potential of atmospheric carbon, as highlighted in Bill McKibben’s current road tour.

These proposals have failed to gain traction politically, however, for a few reasons…

Instead, climate hawks should look to judo, where a smaller fighter can use the weight of a larger opponent against them. In that spirit, I offer the following outside-the-box proposal.

Pitch a FiT
President Obama could side-step the legislative wrangling over incentives for renewables by doing something truly audacious, which would give far more hope to the climate hawks than anything else proposed to date.

He could simply follow the model of the national Highway Trust Fund, and create a national standard for feed-in tariffs (FiTs) through the authority of the Federal Energy Regulatory Commission (FERC).

(FiTs, as I detailed here, have proved to be the most effective policy tools worldwide for incentivizing renewable power generation. They typically pay an above-market rate for renewably-generated power for a decade or more.)…

Climate judo
A national FiT would take essentially the opposite approach to carbon mitigation than has been tried to date. Carbon taxes are all stick, while a FiT is all carrot. The benefits of this approach should be obvious….

My thanks to Paul GipeJennifer GleasonScott ThomassonElias Hinckley, and John Farrell for their expert contributions to this article.
(14 November 2012)

The economics of carbon taxes

Emma Bennett, American Enterprise Institute (AEI)
With the growing need for reform in the US fiscal system, the idea of a tax on carbon has emerged as a possible solution. On Tuesday at AEI, four panels explored the merits and challenges of implementing a tax on carbon, discussing topics ranging from its distributional effects to its potential impact on international trade.

Roberton Williams of Resources for the Future began by highlighting three advantages that a carbon tax has over outright regulation, while AEI’s Aparna Mathur explained the economic reasoning behind a theoretical tax on carbon to correct for externalities of pollution. Panelists also discussed how carbon taxes would function in an international framework and their potential macroeconomic effects.

Karen Palmer of Resources for the Future emphasized the difficulties posed by the complex structure of American government for a carbon tax. Donald Marron of the Urban Institute argued that carbon tax revenues could be used to lower corporate tax rates to increase economic efficiency in the US. Panelists overwhelmingly agreed that more research on the effects of a carbon tax is needed, but that it raises important questions for academics and policymakers alike.
(13 November 2012)
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