Brookings Carbon Tax Proposal

While cap-and-trade mechanisms are the predominant market-based approach to address climate change at both the international and national levels, some jurisdictions have adopted carbon taxes as an alternative, or complementary approach. In the past year, there has been a groundswell of support for adoption of a carbon tax in the United States, with the burgeoning deficit providing an additional impetus for consideration of this option. In a new report published by the Brookings Institution, Mark Muro and Jonathan Rothwell advocate adoption of a “modest carbon tax” to address both climate and fiscal issues.

Among the recommendations from the report:

  1. Congress and the Obama administration should establish a carbon levy of $20 per ton. This figure is supported a study by researchers at MIT that concluded that a carbon tax beginning at $20 per ton and rising 4% annually could raise $150 billion annually over a 10-year period, while reducing carbon dioxide emissions 14% below 2006 levels by 2020 and 20% below 2006 levels by 2050. An assessment of this level would likely have minimal impacts onĀ  consumer prices;
  2. $30 billion of revenue from a carbon tax should be allocated to clean energy and energy-efficiency RD&D and technology deployment. This reflects the authors’ conclusions thatĀ  it is not politically tenable to a sufficiently high price on carbon to push Our experience with the European Union’s Emissions Trading Scheme provides empirical evidence for this proposition, with low prices for emissions allowances failing to spur adoption of low-emission technologies;
    1. $30 billion commitment would bring the energy industry’s RD&D intensity in line with that of the health and IT industries
  3. The remainder of the funds (an estimated $120 annually) should be allocated to tax cuts, deficit reduction and recycling of revenues to effectuate revenue-neutral reductions of taxes that place a drag on investment or employment, such as personal or corporate income taxes, payroll taxes or taxes on capital. This can help to ameliorate the regressive impacts of a carbon tax, as well as spur economic growth.

This reading could generate some good discussion questions, including:

  • Is a carbon tax proposal politically viable, especially if it wasn’t made purely revenue neutral, i.e. if a substantial portion of the tax proceeds were used for energy programs?;
  • Do you agree with the proposition advanced in the report that a carbon tax is “simpler and more transparent than ‘cap-and-trade’ schemes? Isn’t it possible to lard a carbon tax with loopholes and exceptions that would make it commensurately abstruse?;
  • Do you agree with the level of funding that the authors propose for energy programs? Would it make more sense to use all of the funds for this purpose?

 

 

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