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The Economic Benefits of Carbon Taxes

| Monday October 8th, 2012 | 4 Comments

Every day the U.S. lacks a federal carbon tax is a day Americans ignore a solution to reduce the deficit. That is the finding of a new study by the Congressional Research Service, which showed that the U.S. deficit could be reduced fifty percent in ten years by the adoption of a $20/metric ton carbon tax.

Carbon taxes are an economic silver bullet

In addition to carbon taxes’ potential to rapidly reduce the deficit, they provide countries with a new source of revenue, therefore reducing the pressure on politicians to generate funds through social program cuts and income tax hikes. For example, Australia’s recent carbon market is forecast to generate $4 billion in profits in 2013; the UK will make $1.06 billion in same period. The U.S.’ own Regional Greenhouse Gas Initiative (RGGI) makes about $200 million annually. Though these numbers are modest in the world of national finance, part of the beauty of a carbon tax is that the cost of carbon can be ratcheted higher, which increases governmental revenue while improving the environment.

It turns out that improving the environment is key to creating a stable economy. Another new study shows that the global economy is losing $1.2 trillion (1.6 percent of global GDP) in value annually due to climate change. The study suggests that climate change could cost some nations over 10 percent of their annual GDP by 2030. Americans, who will see food prices rise 3 percent this year due to the Midwest’s crop-killing summer extremes, are starting to meaningfully understand the financial cost of climate change. To stabilize and reverse these trends, we must mitigate or halt climate change, if possible. To do that, carbon must be regulated.

Carbon taxes don’t cause economic ruin

The success of numerous, profitable carbon markets disproves critics’ “the sky is falling” attitude toward carbon regulation. Carbon regulation exists in seventeen countries  internationally (Finland, Germany, Denmark, Ireland, Italy, Sweden, Switzerland, the UK, Australia, India, New Zealand, Netherlands, Norway, Slovenia, India, Costa Rica, and parts of Canada (Quebec, British Columbia, Alberta), and nine states domestically (Massachusetts, Connecticut, New Hampshire, Maine, Rhode Island, Vermont, Maryland, New York, Boulder, CO). Taiwan, China and California seem to be on the path to regulating carbon by 2020, and South Africa will have a carbon tax in place by 2013. Further, nations with carbon markets enjoy some of the strongest economies on the planet. Many American states with carbon regulation suffered least in the recession and recovered faster than states without carbon regulation.

Hope for U.S. carbon policy remains 

Though the President seems inclined to block an opportunity to include the U.S. commercial airlines in EU aviation carbon regulation, it is a cause for optimism that the Congressional Research Service is studying carbon markets. The Congressional Research Service is a part of the Library of Congress and is the most reputable, elite source of analysis in the country. CRS advises Congress directly and has unmistakable significance in the policy world. CRS’ consideration suggests that carbon taxes are a policy issue that Congress may be interested in.

Image by ilco.


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  • Tim MacDonald

    First, I support carbon balancing.

    That said, I have trouble drawing a connection between carbon tax and carbon balancing.

    Is the thought that imposing a tax will raise the price at the pump/meter, thereby internalizing environmental impacts into the best-fit/least-cost dynamics of customer choice?

    If so, the problem, I think, is one of scale. We still do not have non-fossil supply solutions that can be deployed at a scale that can make a meaningful difference. Not, at least, without requiring a pricing premium so large that it will test the resolve of even the most ardent environmentalists.

    The carbon crisis, as I understand it, is a massive problem some 150 years in the making.

    If a small tax on fossil fuels can fix this problem, then let’s do it. If not, isn’t just a contentious distraction from the more important work of radically re-configuring our global energy supply infrastructure?

    I vote with those that believe it will be better for all if we can co-opt the fossil fuels industry to work with us in solving this challenge. How can we do that?

    • http://www.facebook.com/jen.boynton Jen Boynton

      Thanks for your comment! Most of the carbon tax proposals I’ve seen apply the tax upstream, so in the case of gas, the tax would be applied not at the pump but at the extractive or refinery level. The theory is that it will incentivize companies to implement carbon savings measures high up in the value chain in order to save money. It’s not meant to be a punitive tax on consumers (though one of the strongest arguments against carbon taxes is that the costs will just be pushed downstream to consumers anyway.)

    • http://twitter.com/ameliatimbers Amelia Timbers

      Hey Tim- author here. I agree with Jen’s comment. Additionally, what I see a carbon tax doing is reducing the output side of the carbon balancing equation by discouraging large scale users. In a sense we do want to punish large scale carbon outputs so as to encourage them to stop.

      While scale is a key player in energy economics, when you say “We still do not have non-fossil supply solutions that can be deployed at a scale that can make a meaningful difference.” , and also “the more important work of radically re-configuring our global energy supply infrastructure?”, I think you hit upon a chicken/egg conundrum.

      Reconfiguring the global energy supply/ economy, since they are so closely tied, must start with some policy. This problem is at least 150 years in the making, and it could take us that long to unwind it. Further, even the rosiest forecasts show notable oil field depletion in less than 100 years. That ‘important work’ is far overdue, and a carbon tax is, of all other available options, one of the most feasible.

      The reason we have not worked harder to develop non-fossil supply solutions is because there has not been a *need* to. Fossil fuels are, even at $6/gallon, not prohibitive. A carbon tax, which can have as much teeth as voters can equip it with, is necessary to instigate the development of non-fossil supply options.

      @ameliatimbers

  • josephbrin

    The
    new environmental book, Green Illusions, shows the importance of addressing carbon
    tax as a first step in combating our broader energy and environmental challenges. The author argues that carbon tax is a better project to pursue than new energy technologies, which have many negative side effects and limitations.
    This book also details why we’ll need more than just contraception to address
    population concerns.