U.S. carbon tax could halve deficit in 10 years: report

WAHSINGTON, Sept 26 (Reuters Point Carbon) - Imposing a $20 per metric ton carbon tax in the U.S. could reduce the country's budget deficit by 50 percent over the next 10 years, a report by the Congressional Research Service said on Tuesday.

Such a tax would generate approximately $88 billion in 2012, rising to $144 billion by 2020, the report said, slashing U.S. debt by between 12 and 50 percent within a decade, depending on how high the deficit climbs

The U.S. budget deficit has exceeded $1 trillion annually in each fiscal year since 2009, and could rise to between $2.3 trillion and $10 trillion by 2020, according to the Congressional Budget Office (CBO).

Since deficits can lead to reduced savings, higher interest rates and higher levels of inflation, reducing them is a high-priority issue in Washington.

The concept of using a carbon tax to combat the problem has been floated in Congress this year, but it comes with many potential downsides, the report added.

For example, households would face higher energy bills because utilities forced to pay the tax would likely pass the costs onto consumers.

"Lower-income households, in particular, would face a disproportionate impact if revenues were not recycled back to them in some fashion," the report said.

Returning money to consumers would mean fewer funds available for cutting the deficit.

And unlike a cap-and-trade system, where the government would set a hard limit on the amount of CO2 that could be released into the atmosphere, a carbon tax could not ensure a specific environmental outcome, the study said.

The likelihood of Congress passing such a measure would be limited, given the opposition of many Republican lawmakers to any type of tax increase.

Despite the odds, some politicians in Washington continue to promote the idea.

Former Republican Congressmen Sherwood Boehlert and Wayne Gilchrest joined Democrats Henry Waxman and Ed Markey to support a carbon tax in February.

In July, former Republican Congressman Bob Inglis launched a think tank to promote a plan to raise taxes on fossil fuels while cutting income tax, a concept previously supported by former Democratic Vice President Al Gore.

Democratic Congressman Jim McDermott last month introduced a Managed Carbon Price (MCP) bill to cut and put a price on carbon emissions, while returning some money to consumers and using the rest to reduce the deficit.

(Reporting by Valerie Volcovici; additional reporting by Rory Carroll)