Carbon Pricing Would Cut the Deficit and Create Jobs

NRG Energy’s W.A. Parish Electric Generating Station in Thompsons, Texas. Putting a price on carbon could generate revenues that we could use to lower the deficit, while creating jobs and stimulating new demand for American goods and services.

by Susan Lyon and Jorge Madrid

As Congress takes a hard look at deficit reduction, we should put all of our options on the table. A price on carbon is one of these options. It could raise upward of $846 billion over a 10-year period, according to the nonpartisan Congressional Budget Office. It’s no magic bullet for our nation’s deficit issues, but it is certainly a practical way to raise revenues while also creating jobs, fighting climate change, and saving programs for struggling communities. And you might not realize it today, but the policy does have support from across the political spectrum.

Here we examine how carbon pricing would work and why it’s a good proposal.

Further deficit reduction should include new revenues and smart cuts

The debt deal compromise reached between Congress and President Barack Obama will cut federal discretionary spending by about $1 trillion over the next 10 years, with the so-called “super committee” accountable for another $1.2 trillion in deficit reduction proposals by Thanksgiving. The secondary round of deficit reduction measures can be achieved by further spending cuts or through revenue-raising strategies.

Republican leadership has made clear they have no intention of raising additional revenue even when it comes to closing tax loopholes that primarily benefit the wealthy or ending tax breaks that go to the richest 2 percent of Americans. Likewise, present tax giveaways to some of the most profitable industries in the country, like Big Oil, are also off the table even though the tax-subsidized industry racked in a massive $35.1 billion in profits in the second quarter of 2011 alone.

We also know that the first wave of cuts was made on the backs of low-income Americans. The cuts will place restrictions on our annual spending bills that could impact investments to programs that fund education and training dollars, as well as funding for employment programs, housing assistance, heating and cooling assistance to low-income seniors, and child care services that allow mothers to enter the workforce. Cutting more funding to programs that help low-income and working-class Americans will cause even greater pain.

Likewise, a cut-only strategy could be absolutely devastating for our jobs crisis. Today, 25 million Americans are in need of a full-time job, with unemployment still above 9 percent and nearly twice that rate for African Americans and 11.3 percent for Latinos. If less people are working, less people are spending, and economic recovery will be slow and anemic at best.

According to the Economic Policy Institute, the combined effect of the deal’s spending cuts and allowing unemployment benefits and the payroll tax holiday to expire would cost the U.S. economy 1.8 million jobs through 2012 alone. It will also likely exacerbate poverty as unemployment benefits kept 3.3 million people out of poverty in 2009.

The upshot: To grow and stabilize our economy, we need a balanced plan that includes new revenue sources along with smart cuts.

How a price on carbon would reduce the budget deficit

A cap-and-trade system that puts a price on carbon would reduce the budget deficit by generating revenues from carbon polluters. Here’s how it would work.

First, the government would create carbon allowances, or “emissions permits,” and distribute them to large-scale polluting companies either by auction or allocation at varying levels. The emitting company would then effectively purchase an allowance for every ton of carbon dioxide it emits. The large revenue stream generated by all these payments collectively can then be directed back to consumers in the form of rebates, be used for deficit reduction, and be invested in clean energy.

The various cap-and-trade proposals put on the table in the past few years have proposed varying balances of these three uses of revenue. The Congressional Budget Office scores for three recent cap-and-trade bills—Waxman-Markey, Kerry-Boxer, and Kerry-Lieberman—are all similar: Enough revenues would be generated to dramatically cut the national deficit:

  • American Clean Energy and Security Act of 2009 (Waxman-Markey):
    • Would increase federal revenues by $846 billion over the 2010-2019 period
  • Clean Energy Jobs and American Power Act of 2009 (Kerry-Boxer):
    • Would increase federal revenues by $854 billion over the 2010-2019 period
  • American Power Act of 2010 (Kerry-Lieberman):
    • Would increase federal revenues by about $751 billion over the 2011-2020 period

A “cap-and-dividend” approach to pricing carbon, in which carbon allowances are auctioned off and then all or most auction revenues are returned to American households, has also been proposed. Most notable was the cap-and-dividend system proposed by Sens. Maria Cantwell (D-WA) and Susan Collins (R-ME) in the 2010 CLEAR Act. CBO never scored the system but it had projected revenues between $42 billion and $126 billion with three-fourths of this going back to consumers as rebates.

This proposal would not include significant deficit-reduction revenues, however, and it was also criticized for its relatively weak cap on carbon.

The numbers differ depending upon the total carbon cap set and how revenues are redirected. But the story is simple: Pricing carbon pays off when it comes to the national deficit.

A broad range of thought leaders supports this strategy

These ideas aren’t new, and they are historically not highly partisan as current conservative leaders would have you believe. In fact, the three most recent Republican presidents—Ronald Reagan, George H. W. Bush, and George W. Bush—all promoted use of a cap-and-trade mechanism for efficiently lowering dangerous pollution. They employed such systems to phase out lead in gasoline, cut chlorofluorocarbons and other ozone-depleting chemicals, and reduce sulfur pollution from power plants responsible for acid rain—all without undue cost.

Experts agree on the idea as well. Earlier this year the Peter G. Peterson Foundation funded six national think tanks from a broad range of the political spectrum to put forward plans addressing our nation’s fiscal challenges. Nearly every group participating specifies a price on carbon as an efficient vehicle for raising revenues in their budget plan.

Joe Romm of Climate Progress notes of these proposals:

All in all, this strikes me as a big deal. Just a few months ago, the political acceptability of any carbon pricing was viewed as virtually non-existent, a “third rail” for the foreseeable future. Now you have major policy groups from across the political spectrum seriously entertaining not just any carbon pricing, but a high and rising price sufficient to substantially reduce US emissions and put us on the path needed to meet our obligation as part of an overall global deal.

The Center for American Progress plan, “Budgeting for Growth and Prosperity,” brings the deficit below 2 percent of gross domestic product within six years and fully balances the budget by 2030. The CAP budget institutes an aggressive price on carbon, as well as an oil import fee, and achieves the CO2 reduction targets from the 2009 House climate and clean energy jobs bill (Waxman-Markey): a 42 percent cut (from 2005 levels) by 2030 and an 83 percent cut by 2050.

Of course, advocates will point out that any price on carbon could adversely affect low-income Americans, who pay a larger portion of their incomes for energy costs. But smart policy can mitigate these effects. In the CAP plan, for example, lower-income groups are protected from the impact of higher energy prices through rebates and tax reform.

Putting a price on carbon also would create jobs and stimulate new demand for American goods and services

Setting a price on carbon would accelerate America’s economic recovery while also creating clean energy jobs, spurring technological innovation, and fighting climate change. It is one key step to reach the broader goal of catalyzing the transformation to an efficient and sustainable low-carbon economy.

In reducing the deficit, we need to think about the health of our entire economic system. With staggering unemployment, the focus of any deal needs to be on job growth and the future of the American middle class.

A price on carbon would spur job creation in emerging sectors and industries from clean-tech manufacturing to R&D centers around the country. A Berkeley-Yale analysis of the Senate’s American Clean Energy and Security Act (Waxman-Markey), a comprehensive clean energy and climate bill with a cap-and-trade pricing system, estimated net job creation from a price on carbon included in the bill at 918,000 to 1.1 million jobs. CAP and the Political Economy Research Institute found job creation potential of 1.7 million jobs from the Waxman-Markey bill, which also contained a carbon pricing system.

Further, the clean energy jobs resulting from the innovation and investment that are spurred by a price on carbon are good, well-paying jobs. A recent Brookings analysis found that median wages in the jobs sectors defined as part of the “clean economy” are currently 13 percent higher than median U.S. wages.

CAP also has long argued that putting a price on carbon is essential to shaping an efficient and sustainable solution to the climate crisis. Of course, a domestic price on carbon alone is not enough to avert climate catastrophe on a global scale—nor is it enough to bring the clean energy economy to full scale. A price on carbon and clean energy investments must go hand in hand. But it would play the critical role of spurring new markets and jobs at a moment when Americans desperately need them.

In addition to generating revenues from major polluters, a price on carbon will also offer a price signal to markets that we want less carbon and more clean energy. It turns the negative environmental effects of carbon emissions into a real business cost for emitters, thus correcting a major market failure.

A cap on emissions sets a clear goal and establishes a long-term signal in the market, encouraging innovation and allowing businesses to plan their investment strategies. Put simply, pollution limits are essential for clean energy investments to spur new, low-carbon technologies of the future.

Even in the current political debate, pricing carbon pollution would be a win-win solution: It would cut the deficit, save programs for struggling Americans, spur economic recovery, and create clean energy jobs while also fostering long-term climate stability and economic prosperity.

— Susan Lyon is Special Assistant for Energy Policy and Jorge Madrid is a Research Associate at American Progress. You can find the original post here.

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13 Responses to Carbon Pricing Would Cut the Deficit and Create Jobs

  1. Raul M. says:

    What a wonderful idea that we as a nation could reduce human caused pollution. Such a beautiful bait for the switch between poor people not having to be held accountable for our pollution to the middle class and up not having to pay for their pollution. But, nature won’t go along with such a scheem. Nature won’t go along with any of us getting away with such ruin of nature. I think the word ruin has a particular meaning that applies.

  2. Buzz Belleville says:

    I’ve always been for placing a price on carbon, but as I’ve taught Sustainable Energy Law over the years and watched the political process unfold, my thinking on how we should approach it has veered away from the traditional cap-and-trade approach. I am now a fan of a modest revenue-neutral carbon tax. And here’s the thought process.

    (1) Waxman-Markey was a beast. Almost 2000 pages. Anytime we start crafting a program that has the govt administering a system such as this, that of necessity is going to include offsets, we create a system rife for favoritism and speculation. (Just look at how agricultural offsets were going to be doled out).
    (2) We all should know that the production and investment tax credits (and most likely the DOE guaranteed loan program) for renewables are on the chopping block. And as subsidies for big oil and coal get chopped, it is going to be a superficially attractive proposal that all energy subsidies, even for renewables, should get the same treatment. (Note, I don’t agree with this argument, but we need to deal in the politically possible).
    (3) The whole basis for the renewable tax credits, legally and morally, is to level the playing field not only to account for subsidies and govt-funded fossil fuel infrastructure, but for the external costs that fossil fuel combustion imposes on society (and that renewables and alternatives would not). Our leaders need to start talking in terms of externalities. Even without climate change mitigation cost considerations, the NAS has placed the societal costs from fossil fuel combustion at $120 billion per year.
    (4) Historically, talk of tax increases was politically poisonous. Now, I think, subsidies are going to draw even more ire. Placing a price on carbon or incentivizing alternatives have the same levelling effect.
    (5) The proposal would be that, as the tax credits for alternatives are drawn down, the price of carbon ratchets up at identical levels.
    (6) The revenue-neutral aspect of such a carbon tax would need to be emphasized for this to have a chance. The tax is collected at every wellhead, mine and port of entry. Every penny collected is returned to the public in equal amounts per adult (and half shares for each kid). The initial level would have to be set quite low because the cost of the tax would no doubt be passed upstream to the end users, and folks can’t be scared by drastic price increases. At least not until they start getting their rebate checks each Spring.
    (7) The low level of the initial tax would not dramatically change behavior (at least not as much as I and most CP readers think it needs to be). But again, we need to deal with the politically possibe. And, very significantly, it would put in place the mechanisms to allow for a higher tax to be collected in the future, once the pendulum of public opinion swings back and folks start liking those rebate checks every Spring.
    (8) It will be easily understood that folks who are energy efficient will receive more in rebates than they pay in increased costs, while folks who live energy-intensive (or fossil-fuel-intensive) lives will be net losers. The incentives for personally increasing efficiencies will be in place and easy to grasp.
    (9) Even though the tax itself will be revenue-neutral, it will ultimately be a debt reducer, another political selling point. This is because government will be spending less on alternatives, even though the playing field between alternatives vs. fossil fuels continues to be as level as it is under the present system.
    (10) Collins (of Collins-Cantwell), Murkowski, Alexander have all supported some version of a revenue-neutral carbon tax. I have to believe that some of the GOP who recognize the AGW problem (Graham, McCain) could return to their statesmen roots and get behind such a plan, to offset Dem opposition from the coal states.
    (11) Under international law, such a system would also allow us legally to place a tariff on incoming goods (not just oil, but fossil fuel intensive products from China). If spun right, this could be a political selling point. But more importantly, it would allow the U.S. to exercise its huge leverage as the world’s biggest consumer to influence behavior in the developing countries.

    I’m still fine-tuning this proposal for a paper I’m working on, so I welcome all comments.
    My two cents.

  3. DRT says:

    I like the fee and dividend approach for all the reasons you outline above. I think the fee should be based on two things. 1)The direct CO2 or CO2 equivalent content, that is, how much CO2 equivalent GHG does this oil or gas produce when burned. And 2), what is the ‘included CO2’ equivalent content. So for example when assessing the fee for imported oil, how much CO2 equivalent GHG was produced to get it out of the ground and get it to the point of import. In this way tar sands oil reflects its price relative to mideast oil, and the fee for fracked gas includes the externality of the wasted leaked methane.

  4. Buzz Belleville says:

    Right on DRT. Couldn’t agree more. and should have made that clear in my posting.

  5. dick smith says:

    As a retired judge I sympathize with lawyers who wrestle with policy ideas at the intersection of law and economics.

    I thought Steven Stopf’s 2008 book, “Carbonomics: How to Fix the Climate and Charge it OPEC”, was excellent. Without dumbing down the economics (too much) it persuaded me that a neutral carbon tax is the way to go. Good luck.

  6. Paul Magnus says:

    The end game is not prison, its the end of the world…

    The carbon tax: not a good bargaining chip
    As an individual country considers whether or not to incur the costs of reducing carbon emissions in its own economy, it faces a prisoner’s dilemma. It can cooperate (that is, take action to reduce emissions, and incur the costs of doing so) or defect (that is, fail to take such action). The ALP has.

  7. Buzz Belleville says:

    Thanks Judge. I too enjoyed Carbonomics. (I read about this stuff way more than is healthy).

  8. eric.s says:

    Agree with your well layed out rationale for a carbon tax. I would though suggest that in all likely hood it wouldnt be neautral but instead definitely positive. Yes, the money taken in is given out (neutral) but the spin off effects on the economy of a population with rebate cheques or reduced income tax is significant – double benefit.

    Also, I strongly agree with your statement that the tax value does not have to be high at all. Here in Alberta there is both a carbon market (cap and trade) and a carbon tax. The tax sits at only $15/tonne – our BC neighbours will have a $30/tonne carbon tax in 2012.
    Even with a meagre $15/tonne tax the province has accumulated over $300 million over the last several years. This money is then invested in renewable energy tech though, not given back to the public (the way the money is spent is rather suspect and topic for another conversation). Alberta is an energy intensive province but with a population of only about 3 million. Extrapolate that to the US – the dollars make sense.

    Cap and trade is heavy on the regulatory side, needs serious monitoring and is administratively complex. A tax is simple and easy.Once its in the door people will like the revenues it generates and realize the world did not suddenly end because of it. It can then be slowly ratcheted up as the public and businesses adjust.

  9. dick smith says:

    Buzz, I think all of us unhealthy readers of this stuff occasionaly identify with singer Bob Seger’s lament about a cheatin’ girlfriend…”I wish I didn’t know now what I didn’t know then.” Hang in there.

  10. David B. Benson says:

    I favor a Fossil Carbon Open Air Disposal fee.

  11. Geoff Beacon says:

    Susan Lyon and Jorge Madrid say:

    The upshot: To grow and stabilize our economy, we need a balanced plan that includes new revenue sources along with smart cuts.

    I agree with their basic theme that a carbon tax can be made to create employment but we should not assume that the route is simply via “growth”. “Growth” can mean too many things, good and bad (GDP=Pollution, ).

    It is simpler to say “Tax carbon. Subsidise jobs” and ignore the g-word.. It should be emphasised that wage subsidy policies are based on market forces and use the private sector for their effect. Professor Kim Swales says

    There is an increased faith in “market forces” and a desire to reduce subsidies that artificially maintain inefficient or inappropriate industries. However, where there are high levels of structural unemployment amongst primarily low skilled workers, long-term labour subsidies should be considered. Such subsidies improve productive efficiency by offsetting market failures in other parts of the economy. They restore, rather than distort, appropriate price signals. They do not rob the private sector of resources but reallocate resources within that sector. Such subsidies generate an expansion, not contraction, of private sector economic activity.
    (Jobs and climate change,

  12. DRT says:

    As far as:
    ” Under international law, such a system would also allow us legally to place a tariff on incoming goods (not just oil, but fossil fuel intensive products from China). If spun right, this could be a political selling point. But more importantly, it would allow the U.S. to exercise its huge leverage as the world’s biggest consumer to influence behavior in the developing countries.”

    Let’s not limit the fee to fossil fuel intensive products. I suggest a carbon content fee/tariff on all incoming goods and services based on the carbon cost it took to produce that product and get it to the point of import. The fee should be reduced or eliminated for imported goods when the provider can show that it was produced in a less GHG intensive manner.

    Also apply the carbon fee to non-energy production sources of GHGs such as CAFOs, concentrated animal feeding operations, and cement production.

  13. Buzz Belleville says:

    I hear you DRT. My understanding is that, under GATT, we can only impose a tariff on imported goods that is comparable to that imposed on domestic goods. Though I’m not an international law expert, I feel confident in that reading of the GATT treaty. So, if domestic goods are getting a bump up in price due to the cost of fossil fuel, then a tariff equal to that price increase could be imposed on imports that are not subject to a comparable cost in their home countries.