Carbon tax discussion gains momentum as fiscal cliff looms

A debate over how to use the revenue from a carbon tax is taking shape, with one plan pushing back on conservative sentiment that revenue from an emission price should be restricted to cuts in other taxes, beginning with income tax.

A new paper by the Brookings Institution argues that a carbon tax could generate $30 billion a year for clean-tech investments, including the deployment of specific technologies. Such a carbon tax, priced at $20 a ton, would also raise an estimated $120 billion annually to reduce the deficit and lower other tax rates, a key negotiating point meant to attract Republican support.

"The impetus here is what we view as a lapse in the discourse so far," said Mark Muro, a senior fellow with Brookings' Metropolitan Policy Program and a co-author of the paper. "It's great to see carbon tax getting lots of attention now. We think it's an important tool. But we seem to have lost emphasis on direct investments in technology."

The emerging discussion about using revenue from a carbon tax to help avert the fiscal cliff -- the threatening collision between the expiration of the Bush-era tax cuts and sudden spending cuts by the federal government -- has been focused on swapping an emission price for lower corporate or personal income taxes.

There's a key reason for that: A number of Republican economists, advocacy groups, and a former lawmaker are open to a carbon tax if it results in a boost to the economy through lower taxes. Taxing carbon would be a small piece of a larger tax reform effort, making it less politically risky for conservatives to support it.


"A carbon tax replacing an income tax is a plus for me," Arthur Laffer, who served as an economic adviser to President Reagan, said in a recent interview. "It could fit well into a big package."

Taxing emissions has also been promoted by several of Mitt Romney's campaign advisers. One of the most prominent, Greg Mankiw, indicated yesterday by email that he wouldn't actively lobby for a carbon tax. But he added, "if anyone asks, I'm happy to express my views."

Possibility of bipartisan support

The argument has so far focused on the economic message behind a carbon tax. The Brookings paper is meant to establish a new marker in the discussion, one that emphasizes the environmental impacts of climate change. That might make some advocates -- on both sides -- cringe. They believe that embedding the debate in an economic discussion might be the only way to overcome sharp opposition to climate policies spawned by the failed cap-and-trade debate. Involving environmental organizations could threaten that Republican-friendly framing, some say.

But Muro points to looming budget cuts as a reason to dramatically increase funding for fuel-saving technologies through potential taxes paid by power plants and other emitters of greenhouse gases. Federal investments in clean energy, on pace to be $3.7 billion annually by 2014, lag behind public funding for information and health technologies, Muro says.

"At a minimum, the potential windfall of significant revenue associated with the introduction of a properly designed price mechanism for discouraging carbon pollution would seem to raise the possibility of a bargain in the next Congress that could provide an efficient, inspired response to the fiscal and climate crises at once," the Brookings paper says.

The paper coincides with a conference being held today on the prospects of a carbon tax. One sponsor is the American Enterprise Institute, some of whose scholars joined other think tanks and experts in private discussions this summer to advance the underpinnings of a carbon tax.

Today's event will focus on how to design a carbon tax and how to use its revenues -- two themes that would likely be at the heart of negotiations between lawmakers and the Obama administration. So far, the discussion has been limited to think tanks and academics, advocates say.

Paul Bledsoe, an independent consultant who worked as an aide to the Senate Finance Committee when lawmakers were debating a Btu tax in the 1990s, believes the topic of raising new revenue won't surface until after Congress tackles the Bush-era tax cuts, which are due to expire at year's end. He sees a carbon tax -- just one potential revenue source in a buffet of provisions -- as a potential character in Act 2, beginning perhaps early next year.

"There is an obvious reluctance to talk about how you would generate the revenue too far in advance," Bledsoe said. "No one wants to breach these prematurely and expose them to attack."

There's a litany of potential revenue sources. Some of the biggest dollar amounts might come from ending tax loopholes, which together amount to $1.1 trillion annually, according to the National Commission on Fiscal Responsibility and Reform, known as Simpson-Bowles.

'Something's got to bend'

But those tax deductions, exemptions and other loopholes will be fiercely defended by special-interest groups. Another portion of new revenue could come from President Obama's plan to raise taxes on households earning at least $250,000. Confronted with a series of difficult decisions, Congress could turn to adding a carbon tax, rather than eliminating existing programs that spend an equivalent amount of money, some experts say.

"Our tax system is sufficiently flawed, and our budget situation in the long run is sufficiently dire, that policymakers will eventually have to make choices that seem outside the bounds of what today's politics would allow," said Donald Marron, director of the Tax Policy Center and former adviser to President George W. Bush. "But something's got to bend. And it's a little hard to predict in advance of what that's going to be, but certainly carbon tax is one of the things that they have an opportunity to think about."

The Brookings paper foreshadows what could become a point of debate between Democrats and Republicans if taxing carbon emerges as a revenue option.

Democrats might press for clean energy investments in electricity generation and the transportation sector, believing Superstorm Sandy underscores the future risks of climate change. Republicans, meanwhile, might adhere to the anti-tax pledge that nearly all of them signed at the urging of Grover Norquist, president of Americans for Tax Reform.

A carbon tax might not violate that pledge if it reduces other taxes by as much as or more than money levied on emitters. But if lawmakers began using carbon revenue for the kinds of programs that help finance specific technology companies, like Solyndra, they could be exposed to political turbulence. That, in turn, could jeopardize the success, however remote, of a carbon tax.

For Muro, it's worth the risk, because he believes clean energy technologies are a key to reducing emissions.

"We're likely not going to pass Grover's test here, given that we are adamant about the $30 billion for energy technology," he said. "It's hard to say what the immediate prospects are for an emissions fee now. But I think a lot of us want to have some well-developed ideas available as the search for revenue gets urgent."

Instituting a carbon tax as part of a deal between President Obama and Republicans to avoid the "fiscal cliff" would cut the deficit in half by 2022, economists at HSBC bank wrote in a report.

While Obama is likely to have limited scope for strategic action on climate issues, he could explore the possibility of a carbon tax as part of a deal with Republicans in Congress to raise revenue and cut spending and reduce the federal deficit, HSBC analyst Nick Robins wrote. A good starting point would be a $20 per ton of carbon dioxide tax, rising at about 6 percent per year, which would raise $154 billion by 2021, he said, citing data from the Congressional Research Service.

Still, environmentalists shouldn't get their hopes too high, Robins said.

"Silence on climate issues during the campaign until the onset of Hurricane Sandy and continued Republican majority in the House means that scope for strategic action will remain limited," he said. "Obama's victory essentially protects key climate policies from repeal, particularly the regulation of carbon dioxide by the EPA. It also offers the chance of extending the Production Tax Credit for wind energy."

Extending the PTC for another year will come too late for any real U.S. market recovery in 2013 but may boost volumes in 2014, HSBC said.

"The U.S. wind market is expected to contract from 11 gigawatts in 2012 to just 3 GW in 2013," Robins said. The market will then grow to 4 GW in 2014, his team of analysts predicted.

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