(The author is a Reuters market analyst. The views expressed
are his own.)
By Gerard Wynn
LONDON Nov 9 Academics and lawmakers have
proposed a U.S. carbon tax to curb carbon emissions and trim the
debt pile, but the idea depends on prominent Republican support,
so far absent.
Without a deal on cutting the fiscal deficit the United
States faces a $600 billion package of automatic tax increases
and spending cuts which could tip the country back into
While that is clearly a step too far, the consensus is that
a more gradual combination of spending cuts and/or tax hikes is
required to avoid a borrowing crisis.
Many economists have argued for a carbon tax: it would lead
to net welfare benefits compared with for example hikes in
income tax, even before allowing for avoided climate change.
But it faces formidable problems.
It would acknowledge a climate threat, hike energy prices,
hurt U.S. competitiveness (without including complicated
compensating measures), and sound very much like a failed cap
and trade bill.
To progress, supporters would have to paint a nightmare
alternative including cuts in defence and social spending and
income tax rises, and demonstrate clear daylight with a proposed
cap and trade scheme which failed to win Congress approval in
Some energy executives and notably Exxon's chief executive
have previously said they much prefer a carbon tax.
A cap and trade bill only narrowly passed the House of
Representatives by 219-212 in June 2009 before mid-term
elections saw Republicans take a House majority, and failed to
pass the Senate.
A carbon tax, or cap and trade scheme makes emitters pay for
climate damage from burning fossil fuels and so drives a shift
towards cleaner alternatives.
The notion of using carbon pricing to cut the U.S. budget
deficit dates back to the Congressional Budget Office (CBO)
report in March 2011, "Reducing the Deficit: Spending and
The CBO reviewed cap and trade, or a carbon tax among 104
other options for raising tax revenues or cutting spending.
It reported that a scheme which applied a carbon price of
$20 tax per tonne of CO2 would raise nearly $1.2 trillion by
Costs would be passed to energy consumers, its biggest
political problem not always mentioned by economists, requiring
some compensation which would steal funds from deficit cutting.
"The government could use some of those revenues to
accomplish various goals such as reducing taxes, offsetting the
costs of the cap-and-trade programme for certain groups or
industries that are put at a competitive disadvantage by the
programme, or reducing the federal deficit," the CBO report
A Massachusetts Institute of Technology (MIT) study in
August found that a carbon tax would have a net economic benefit
compared with allowing certain Bush-era tax cuts to expire,
while still cutting the deficit.
Effectively they would swap one tax (on income, if Bush cuts
expire on Dec. 31) for another (on carbon).
The authors attributed the net economic benefit to a greater
"drag" on the economy from income tax than a carbon tax.
The study did not quantify other benefits such as avoided
climate change or lower crude oil imports, or try to compensate
"Given that all other options for dealing with the Federal
deficit require difficult tradeoffs, it would seem hard to pass
up one that offers so many advantages," the authors concluded in
their paper "Carbon Tax Revenue and the Budget Deficit: A
As Joseph Stiglitz said, in support of a carbon tax in his
2006 book "Making Globalisation Work":
"The country as a whole might be better off; it can use the
revenue from the carbon tax to reduce other taxes, such as those
on savings, investment, or work. These lower taxes would
stimulate the economy, with benefits far greater than the cost
of the carbon tax. This is consistent with a general economic
principle: it is better to tax things that are bad like
pollution than things that are good like savings or work."
Support from economists is one thing.
Given expected higher fossil fuel energy prices and
therefore lower consumption, an endorsement by Exxon Chief
Executive Rex Tillerson three years ago was more startling.
But that was in the context of shooting down cap and trade
proposals when no alternative tax was suggested, and may
therefore be more significant for rejecting one than supporting
"As a businessman it is hard to speak favourably about any
new tax. But a carbon tax strikes me as a more direct, a more
transparent and a more effective approach (than cap and trade).
It could be levied under the current tax code without requiring
significant new infrastructure or enforcement bureaucracies,"
Tillerson told a Washington energy security conference in 2009,
as quoted in the Exxon journal "The Lamp".
"A carbon tax is also the most efficient means of reflecting
the cost of carbon in all economic decisions - from investments
made by companies to fuel their requirements to the product
choices made by consumers.
"Such a tax should be made revenue neutral. In other words,
the size of government need not increase due to the imposition
of a carbon tax. There should be reductions or changes to other
taxes - such as income or excise taxes - to offset the impacts
of the carbon tax on the economy."
The biggest practical problem of a carbon tax is softening
its impact on energy consumers and energy-intensive industries.
The European Union has demonstrated that distribution
problems can be solved, where for example power plants in poorer
east European countries face a softer transition, and factories
which face international competition get free emissions permits.
But political efforts now to raise European carbon prices
face opposition from some member states, concerned about higher
energy prices, even though it would raise funds for government
coffers, in the same way as a U.S. tax.
In the face of undoubted, entrenched opposition from certain
stakeholders including energy-intensive manufacturers and
farmers, the only chance for a carbon tax in the United States
is if Democrats prioritise it, and Republicans accept it as the
least-worst option, for environmental legislation.
(Reporting by Gerard Wynn)