The Case for a Carbon Tax

Back in June, Senators Sheldon Whitehouse (D-RI) and Brian Schatz (D-HI) proposed the American Opportunity Carbon Fee Act of 2017. This bill would set a price on carbon pollution, beginning at a fee of $49 per metric ton of emissions in 2018. The fee would then increase annually by 2 percent over inflation.

The odds of this bill becoming law are low. Currently, the Republican Party controls 52 of 100 Senate seats and 239 of 435 House seats. By contrast, the Democrats, already the minority party, aren’t even united behind Whitehouse’s and Schatz’s proposal. Even in an “optimistic” scenario in which the bill somehow passed Congress, it would be dead on arrival. President Donald Trump has expressed opposition to a carbon tax and would probably veto the bill (unless he flip-flopped on the issue).

The bill’s inevitable failure is unfortunate, as it has many merits. Consider how the American Opportunity Carbon Fee Act would significantly lower greenhouse gas emissions. According to the non-partisan think tank Resources for the Future, the bill would lower emissions by 36 percent compared to 2005 levels by 2025. By mid-2020s, the United States would beat its carbon emissions targets set forth in the Paris Climate Agreement. As a comparison, the Obama administration’s Clean Power Plan would only lower emissions by 26-28 percent.

The carbon tax would also generate an estimated $2.1 trillion in the next decade. There are a number of ways in which this revenue would be used to directly benefit the public. First, workers would get an annual inflation-adjusted $550 refundable tax credit. Second, the revenue would provide Social Security beneficiaries, veterans, and disabled individuals with an inflation-adjusted annual benefit beginning at $550. Third, it would deliver at least $10 billion annually in grants to states to assist low-income and rural households as well as to provide job training and worker transition assistance.

More problematically, the bill would reduce the top marginal income tax rate from 35 percent to 29 percent. One response is that lowering corporate taxes probably wouldn’t create many jobs; this part of the bill would benefit corporations much more than the average American. In an ideal plan, revenue would go more directly toward the public in the form of clean energy or infrastructure investments.

However, given the current political climate, it is necessary to couple a carbon tax with tax reform. As already discussed, the Democrats are a minority party in Congress. In fact, Democrats may lose Senate seats in the 2018 midterm elections, despite President Trump’s unpopularity. This is because ten Democratic incumbents are up for reelection in states that Trump won in 2016. Democrats don’t have the numbers to pass a carbon tax on a party-line vote. One way or another, they need to extend an olive branch to Republicans to give this bill any possibility of passing.

The most common argument against a carbon pricing mechanism (e.g. a carbon tax) is that it would hurt the American economy. However, this claim is inconsistent with real-world data. California, British Columbia, Québec all adopted carbon pricing without “witnessing adverse effects on their industrial sectors and economic growth.” The same is true of France, Norway, Sweden, and Switzerland. One explanation is that carbon pricing offers an incentive for businesses and consumers to “use less fuel, invest in efficiency, and switch to cleaner energy.” As a result, companies remain competitive while also promoting environmentally friendly policies.

In addition, the cost of inaction is too great. According to an article published in Science, the United States could face damages worth 0.7 percent of GDP per year by the 2080s for every 1 degree Fahrenheit rise in global temperature. The worst-hit counties could “see losses worth 10 to 20 percent of GDP.” More broadly, climate change could cost the global economy trillions of dollars. A Citigroup report from 2015 found that limiting temperature rises to 1.5°C, instead of 4.5°C, could minimize global GDP loss by $50 trillion. In short, even if a carbon tax does hurt the American economy in the short term, it is still an ideal policy.

Another argument against a carbon tax is that it would fail to mitigate the worst effects of climate change. After all, the United States is only responsible for about 16 percent of global CO2 emissions. One response is that the carbon tax would be part of a concerted global effort to combat climate change. For example, China – which is responsible for 28 percent of emissions – has recently introduced a national carbon trading market. This cap-and-trade approach sets a ceiling for greenhouse-gas emissions and allows businesses to buy and sell emissions permits “in the hope of unleashing market competition to save energy and embrace clean technology.” Collectively, the global community could make a significant dent in CO2 emissions.

One final critique is that a carbon tax (e.g. the American Opportunity Carbon Fee Act) has no chance of becoming law. The Republican Party, and some Democrats, are too adamantly opposed to the concept, critics argue. However, there is reason – however small – to be more hopeful in the longer term. Consider how six to ten Senate Republicans allegedly support Whitehouse’s and Schatz’s bill in private. In addition, a number of Republican elder statesmen, including James Baker, George Schultz, and Henry Paulson, publicly back the idea of a carbon tax. All of this suggests that a bipartisan carbon tax could pass within the next decade.