In February 2017, James Baker III, George Schultz, and a group of conservative politicians and economists published a clear and convincing call to adopt a carbon tax in the United States.
Seventy governments around the world already have adopted carbon-pricing schemes. It is time for the U.S. to join them. It is not only a good idea, it is now feasible.
In the past month, there has been a convergence of events pointing toward the potential for a U.S. carbon tax. In October, the Intergovernmental Panel on Climate Change published a report indicating the expected damages associated with 2-degrees Celsius warming are much higher than at 1.5 degrees — marine fisheries losses would double, sea levels would rise an extra 2 inches, and human exposure to extreme heat would double. This adds to the sense of urgency to mitigate greenhouse gas emissions.
Leading up to the 2018 midterm elections, Republicans called for a second round of tax cuts. With criticism over the massive deficits associated with the 2017 tax cuts, however, they should be cautious about any move that further exacerbates that imbalance.
And, of course, now that the Democrats have regained control of the U.S. House of Representatives, they should be looking for initiatives that all our leaders in Washington can support.
Enter carbon taxes. To see why carbon taxes make sense for a broad range of informed politicians, consider two important observations.
First, price signals are key to enabling markets to allocate resources efficiently. Taxes on capital and income distort price signals in markets, leading to inefficient use of resources. This means that the cost to society of putting a dollar of money in the government treasury can be much more than a dollar.
Second, in the United States, a tax on carbon would be less distortionary than a tax on labor or capital.
These two observations create the possibility for a win-win tax reform.
Because it costs the economy less to raise revenue with carbon taxes than with labor and capital taxes, a shift toward the more environmentally friendly tax also could reduce the overall cost of our tax system and stimulate employment and investment, even as it induces emissions reductions.
Analysis by two leading public finance economists, Ian Parry and Roberton Williams, demonstrates that a tax of $33 per ton of carbon dioxide — about 25 cents on a gallon of gas and less than a couple of cents per kilowatt-hour of electricity — could simultaneously reduce U.S. carbon emissions by 8.5 percent and save the economy $4.5 billion per year, even ignoring environmental benefits.
The key to realizing those savings, however, is that Congress must simultaneously cut the more distortionary income taxes. To offset the potentially regressive nature of a carbon tax — the fact that it is likely to take a disproportionate amount of low-income household budgets — the tax cuts could be supplemented by tax credits, or even payments, to those households.
To succeed, however, our representatives in Washington will need to first design a system that delivers both economic and environmental benefits. That will take discipline, resisting efforts to carve out tax exemptions, and earmark the revenue. And, because the positive effects of a carbon tax are less direct than subsidies or dividends, Congress and the White House will need to carefully explain to the voters why the carbon tax makes sense.
If they succeed, a move to carbon taxes leaves room for both parties to claim victory.
The Democrats can point to the environmental protection and support for renewable energy that are inherent in a carbon tax. Republicans can claim credit for improving the efficiency of the federal tax system. Both sides can show that they are able to work together to find win-win opportunities.
Kenneth Richards is a professor of environmental economics and law and policy at Indiana University in Bloomington. He also is a consultant to the Gnarly Tree Sustainability Institute.