Long-shot carbon tax suddenly part of fiscal cliff debate

WASHINGTON Thu Nov 8, 2012 5:37pm EST

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WASHINGTON Nov 8 (Reuters Point Carbon) - A potential tax on big polluters, a taboo subject in the United States in recent years, has come back into the spotlight as some sense potential for a revenue windfall at a time lawmakers look for ways to the so-called "fiscal cliff" of tax rises and spending cuts due in early 2013.

The aftermath of Superstorm Sandy, which devastated parts of the U.S. East Coast last week, has raised fresh questions about the links between climate change and extreme weather events, which also makes the idea of a carbon tax more appealing.

A carbon tax is a mechanism to charge emitters of greenhouse gases, such as power plants and oil refiners, for each ton of carbon dioxide they emit.

Prospects for such a tax as a way to address pollution and climate are probably dim in a still deeply-divided Congress, but some analysts say the measure would be more attractive if positioned as a source of new revenue.

In fact, a recent report by the Congressional Research Service, suggesting a $20 per ton tax on carbon emissions could halve the U.S. budget deficit over time.

Such a tax would generate about $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 report said.

A handful of former Republican policymakers - ones most likely to reject new or higher taxes as a matter of principle - has been touting its potential to raise revenue for a cash-strapped federal budget.

In research notes after Tuesday's presidential election, analysts at global banks HSBC and Citigroup flagged a carbon tax as a program that could potentially emerge in President Barack Obama's second term.

"One major fiscal possibility is a new carbon tax, which is likely to garner far more support this time around than at any time in the past and could become an appealing part of an emerging consensus on how to avoid the fiscal cliff," said a note from Citigroup's investment research group.

Paul Bledsoe, an independent policy consultant, said a carbon tax on polluters would be "better for the economy than our current taxes on work."

The measure would garner more support if its economic benefits are touted rather than its ability to help the administration achieve its green goals, said Bledsoe, who served as staff on the Senate finance committee during the 1993 budget negotiations.

NUMBER CRUNCHING

The U.S. Treasury has funded a major carbon tax analysis that will explore how the country's tax code can be used to cut greenhouse gas emissions.

The report is being drafted by the National Academies of Science (NAS), which has commissioned a panel of economic specialists to analyze how to reform the way the government raises revenue to encourage cuts in emissions of gases that are blamed for climate change.

The committee, which has met five times since April 2011, is reviewing how direct taxes, such as fuel-related provisions, and indirect measures, such as home mortgage deductions, will increase or decrease emissions rates.

The paper was commissioned by legislation enacted during the George W. Bush administration in 2008, but not funded until 2009. It will be submitted to Congress next spring.

UNLIKELY SUPPORTERS

In recent months, a number of moderate Republicans, including a few economists that advised Republican presidential candidate Mitt Romney, have declared their support for a carbon tax, leading some to believe there is a chance for bipartisan support in Congress.

Harvard professor Gregory Mankiw, economic adviser to Romney, wrote in a 2007 column that "if we want to reduce global emissions of carbon, we need a global carbon tax."

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.

Even George Shultz, Ronald Reagan's former Secretary of State and a fellow at the Hoover Institution, entered the fray, saying that a carbon tax that returns revenue to taxpayers could garner the support of his party.

"The fact that you are seeing more voices come into the conversation and talk about it is a welcome one," said Nat Keohane, vice president at the Environmental Defense Fund and former special assistant to Obama on energy and environmental issues.

"Hurricane Sandy has helped reboot this conversation," he said, by becoming just the latest in a year of extreme weather events in the United States, including major droughts and historic wildfires.

Some remain unconvinced that the Republican-controlled House Of Representatives will be anything but hostile to attempts to price carbon, despite the post-election, post-Sandy buzz.

"I'm quite a skeptic regarding carbon taxes, and I doubt that President Obama could gain enough support in the House to enact one even as part of a broader tax-reform package," said Kenneth Green, a resident scholar at the conservative American Enterprise Institute. "But I could be wrong."

A conference on the "Economics of Carbon Taxes" will be held in Washington on Tuesday by AEI and other groups, including International Monetary Fund and the Environmental Protection Agency.

(Reporting By Valerie Volcovici; editing by Ros Krasny)

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