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Economists slice, dice carbon tax at forum

If the idea that the battling parties in Congress might get behind a tax on heat-trapping carbon emissions is laughable, the tax's proponents don't get the joke.

It won't be long, they say, before a cash-strapped U.S. government sees that fighting climate change makes economic sense.

So almost every day in Washington, D.C., one think tank or another is discussing the pros and cons of the carbon tax.

Yesterday, it was the nonpartisan Resources for the Future's turn. The think tank hosted a forum on carbon taxes that drew not only the usual assortment of policy analysts and environmentalists, but also Democratic and Republican Capitol Hill staff and industry representatives.

"We think that the appeal of a carbon tax in the United States is only going to increase over time," said Ian Parry of the International Monetary Fund, who convened yesterday's panel.

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A future Congress might reach for the policy model as a way to stave off funding shortfalls for retirement and health care programs for tomorrow's seniors, and to manage the "twin challenges" of debt and global warming, he said.

Sens. Bernie Sanders (I-Vt.) and Barbara Boxer (D-Calif.) have introduced a carbon tax bill this Congress and others may be in the works, but they are generally considered test balloons, not measures that could become law.

But panelist Joe Aldy, a Harvard professor and former Obama administration adviser on energy, noted afterward that political realities sometimes change quickly. For example, he said, it once seemed impossible the Pentagon could face more than $40 billion in budget cuts for a fiscal year, but that's what will happen if the sequester takes effect tomorrow as expected.

So, he said, if Congress puts together a large-scale overhaul of the budget and taxation and needs revenues, the carbon tax "is going to be one that gets some consideration."

Resources for the Future doesn't make policy recommendations, but most of the panelists said the carbon tax had merit as a way to internalize the social cost of greenhouse gas emissions and reduce the need for so-called command-and-control regulations and subsidies.

Stanford University economist Larry Goulder said a carbon tax offered most of the same design choices that cap and trade did for greenhouse gas emissions, including the possibility of offsets and mechanisms to protect poor households paying electricity bills. But the tax might surpass cap and trade in administrative ease and ability to prevent industry from circumventing the system with emission offsets, he said. It might also offer covered entities the certainty that carbon prices wouldn't rise and fall as carbon allowances have under the European Union Emissions Trading System.

But the fixed quality of a carbon tax would have political downsides, Aldy noted. Where Congress could give regulators the authority to tighten or loosen emissions caps in response to new information, it would be more difficult for lawmakers to delegate tax-writing authority to the Treasury Department.

So, he said, any change to the tax would have to clear both chambers of Congress. That would not be easy.

Greens, meanwhile, worry Congress would set the tax too low, Aldy said.

"In speaking to environmentalists, they think you can get more ambitious environmental policy if you're focusing on the environmental outcome, like emissions," he said.

'It's not a free lunch'

Either mechanism offers advantages over command-and-control pollution regulation, Goulder said.

"We can talk about carbon taxes versus cap and trade and find reasons to prefer one or the other," he said. "But my view is that there's a great deal to be gained from either instrument relative to more conventional regulations."

Anyone writing a carbon tax would have to make many design decisions, including how and whether to protect trade-exposed, energy-intensive industries from being placed at a competitive disadvantage relative to foreign competitors. Aldy explored some of these options, including providing exemptions or rebates to industries like aluminum or steel, or imposing border tariffs on imports from countries that lack a similar carbon price.

Again, this is an area where politics would influence tax policy, he said. Border measures might afford the best chance of containing the most emissions but might also put the United States at odds with its trading partners, he said. Lawmakers might seek exemptions for constituent industries as a condition of support.

"It's important to understand the economics, and then understand what the implications are when you look through a political lens -- what is necessary to elicit the support to get you through two chambers of Congress if you had a meaningful debate on carbon tax," he said.

The most conservative panelist, Kevin Hassett of the American Enterprise Institute, took a very dim view of cap and trade, calling it "horrifying" because he said it would allow government bureaucrats to make economic decisions "without any market incentives to discipline the mistakes that they make."

Cap and trade also opens the door to corruption, he said.

"We know that they will hand out permits to their buddies," he said. "All you have to do is look at the number of key Democratic donors that have become subsequently entrepreneurs in the green space, often with lots of federal money."

Hassett, who has sometimes been criticized by other conservatives for taking an interest in the carbon tax, said it would be very difficult to design a model that would be truly revenue-neutral.

Several conservatives, including Mitt Romney advisers Greg Mankiw and Glenn Hubbard, both chairmen of the president's Council of Economic Advisers under President George W. Bush, have supported the idea of swapping a carbon tax for reduced taxes on capital.

But Hassett said his own read on the literature suggested a carbon tax was likely to take more money out of the economy than a rollback of corporate interest rates, for example, would put back into it.

"It's not a free lunch," he said.

But Rob Williams, a senior fellow at Resources for the Future, said Hassett's assumptions overlooked the cost of ignoring climate change.

"It's sort of asking the wrong question," he said, adding that it was inexpensive to address climate change through a carbon tax. "Should we be asking if it's free or very cheap? No, we should be doing something about it."

Who attended?

Democratic and Republican staff for the Senate Finance Committee registered for the forum, as did a staff member for House Energy and Commerce Committee Democrats.

Representatives from automakers, utilities, petroleum companies and other industries were also slated to attend.

An employee from Duke Energy Corp. was registered, but spokesman Dave Scanzoni said that should not be taken as indication the utility had taken a position on the carbon tax.

As a member of the U.S. Climate Action Partnership, Duke helped lobby for a cap-and-trade bill in the 111th Congress, and Scanzoni said Duke still regarded it as the most efficient way to address climate change.

"The cap-and-trade program allowed market mechanisms to find the best solutions for reducing carbon emissions," he said, pointing to the Clean Air Act sulfur dioxide cap-and-trade program that has been in place for decades.

Exxon Mobil Corp. was also represented at the event, and its CEO Rex Tillerson has spoken in favor of a carbon tax and against cap and trade.

"If public policymakers were to put a price on carbon to reduce carbon emissions, we think it's the most effective way to do that," Exxon Mobil spokesman Alan Jeffers said.

A tax is more transparent, he said, and so would have the effect of changing consumer behavior. It would also avoid the complexity of building a new market for allowances.

But both Jeffers and Scanzoni touted the emissions reductions that have already been achieved as utilities have moved away from coal and embraced cheaper natural gas.

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