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20 Dollar Per Ton Carbon Tax Could Reduce Deficit By $1.2 Trillion In 10 Years

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"20 Dollar Per Ton Carbon Tax Could Reduce Deficit By $1.2 Trillion In 10 Years"

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Over the last year, there’s been increasing talk in Washington political circles — including conservative ones — about how to use a carbon tax as a deficit reduction tool. However, with an election season in full swing and a large number of Congressional Republicans campaigning against climate action, the current likelihood of getting a price on carbon is officially zero.

In theory, if Obama gets re-elected in November, there could be an opportunity to pass a carbon tax as part of a deficit reduction plan. With Bush-era tax cuts set to expire and Republicans talking a big fiscal game, Obama might have some leverage to play hardball with Congress and push for carbon pricing as part of a larger package.

It’s a long shot. But a new report from the Congressional Research Service released today illustrates why it’s such an enticing prospect. According to the CRS analysis, a modest carbon tax of $20 per ton that rises 5.6 percent annually could cut the projected 10-year deficit by 50 percent — from $2.3 trillion down to $1.1 trillion.

The CRS report models two scenarios — one based on current law (the blue bar below) and one based on an alternative scenario (gray bar below) that assumes a much greater increase in the deficit due to extension of tax cuts and the avoidance of automatic spending cuts through the Budget Control Act. While the two scenarios vary widely, they show that a price on carbon starting in 2013 could fill in a sizable chunk of the federal budget gap:



Here’s how CRS explained the two scenarios:

The possible contribution of a carbon tax to deficit reduction would depend on the magnitude and scope of the carbon tax, various market factors and assumptions about the size of the deficit. In August 2012, CBO released updated budget projections for fiscal years 2012 to 2022. Under current law, CBO estimated the 10-year budget deficit at $2.3 trillion, or 1.1% of GDP. However, using an alternative fiscal scenario, CBO’s projected a larger deficit—$10.0 trillion, or 4.9% of GDP.

Enacting the carbon tax options discussed in the previous section could reduce future budget deficits. As illustrated in Figure 4, a $20/mtCO2 price on carbon (increasing by 5.6% annually) would have a considerable impact on budget deficits using CBO’s August 2012 baseline projection.

  • The 10-year budget deficit could be reduced from $2.3 trillion to $1.1 trillion, or from 1.1% to 0.5% of GDP.
  • Overall, a $20/mtCO2 price on carbon would reduce the 10-year budget deficit by more than 50%.
  • Under CBO’s alternative fiscal scenario, the same carbon tax would have a smaller impact on budget deficits.
  • The deficit would be reduced from $10.0 trillion to $8.8 trillion, or from 4.9% to 4.4% of GDP.
  • Overall, a $20/mtCO2 price on carbon would reduce the 10-year budget deficit by about 12%.

In the first year alone, CRS estimates that a $20 per ton carbon tax could generate $90 billion.

But here’s the catch: As the analysis points out, not all revenues from a carbon tax would go toward deficit reduction. Some revenues might need to be “recycled” back to groups of people that would disproportionately bear the costs of a carbon price; some might be offset by lowering the payroll tax; some might go back to industry to help companies invest in new technologies and make a low-carbon transition; and some might go into government clean energy deployment programs.

There are many possibilities that policymakers and economists need to consider. So simply saying that a carbon tax would reduce the deficit by specific amount doesn’t show the full picture. Still, this report offers a framework showing that a modest price on global warming pollution would be a significant revenue generator — and thus a possible bargaining chip in future conversations on deficit reduction.

The political climate for a carbon tax is not good. But polls show that Americans support such a policy by a fairly wide margin. According to a George Mason University poll from April, 61 percent of Americans say they would be more likely to vote for a candidate who supports a “revenue neutral” tax on fossil fuels that would be used to reduce federal income taxes. That’s not the same as reducing the deficit, but it shows support for using a carbon tax to make changes to fiscal policy.

That same poll showed that 75 of Americans broadly support regulating carbon dioxide as a pollutant.

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16 Responses to 20 Dollar Per Ton Carbon Tax Could Reduce Deficit By $1.2 Trillion In 10 Years

  1. BillD says:

    Politicians have been know to change their minds (flip flops) but how can this be framed so that climate change deniers do not need to admit that they have been wrong? At both local and national levels we still see commentaries about coal that do not even mention climate change.

    • Mitch Beales says:

      I think most “climate change deniers” now admit that climate change is in progress even while they deny that human activity is responsible. In my opinion we must take the approach that, whatever the cause, the consequences are so dire that we must do whatever we can to slow the progress of climate change.

    • Gestur says:

      The theory is that it could be pitched as the lesser of two evils to conservatives if the revenues generated were used to continue the Bush tax cuts and the more recent reductions in payroll taxes. So instead of these taxes being re-imposed automatically by virtue of the so-called fiscal cliff if nothing is done after the election, there might be a swap. Tax income or tax carbon. You *only* get to choose one.

      This piece says nothing about the impacts of such a carbon tax on carbon emissions. I’d say I’m surprised but I’m not really because the tax starts at a very low level of $20/mt CO2e and goes up very slowly at 5.6% p.a. in nominal terms. [E.g. at that rate it would take until 2043 to get to an impact on a $1 increase in a gallon of gasoline.] This is very similar to the package modeled by MIT in their recent study, “Carbon Tax Revenue and the Budget Deficit: A Win-Win-Win Solution?” Their conclusion is that “We also find that, in addition to economic benefits, a carbon tax reduces carbon dioxide emissions to 14% below 2006 levels by 2020, and 20% below by 2050.”

      If that is the absolute best scenario we can hope for politically—and even this at very long odds of being enacted—well, if we don’t have our effective emissions down to zero or negative by then (2050) this isn’t going to end well for any of us. The only optimism I see in this is that getting a carbon tax up and running is the first big hurdle. Once in place, as climate deterioration brings huge expenses to just endure and repair the damage—never mind adapt—it will be easier to crank up the carbon price more significantly. That, too, would be a long shot since effective income would be declining due to climate, possibly significantly, and getting additional taxes in that situation would be a very hard sell.

  2. ZoeyKay says:

    Yes, but isn’t that 20 Dollar Per Ton Carbon Tax cutting into some CEO’s profits? Aren’t those profits more important than the country’s deficit? :-)

    • Jeff Lewis says:

      Zoey:

      I trust your statement was pure sarcasm. It certainly lit up Leif, with whom I share many concerns. If by any chance you were NOT being sarcastic, would you please elaborate on your concern? Do you really believe massive CEO/corporate profits are more important than the federal deficit (and the climate we live under)? I sure hope not…

  3. Leif says:

    I have a $120/ton charge for home garbage, $50/t for compost makings! Waste water fees, even “rain run off” is not free to this person. (Guide lines here?) Corpro/People deserve a bulk rate of free? They pi$s all over themselves at the thought of $25/ton for toxins! In fact they get my tax subsidy support in the process! Get real… Try throwing 19 pounds of paper cups out the car window for each gallon of gas you consume and report! We are talking justice here. Even Morals! Corporations are people now yet don’t respect the fiduciary common law of not polluting your neighbors land. For profit or otherwise!
    The GOP do not fund abortion. Fine. A precedent. Why must I fund, with my TAX DOLLARS, the ecocide of the PLANET!
    What is a fair price to dump tons of toxins in the pristine waters and air of the commons? I seldom see that question asked, much less answered. Ain’t we talking real money here? Cutting school lunches instead?
    Corporations are “People” now. Does not “WE the PEOPLE” mean ALL of us?
    Stop profits from the pollution of the commons.
    Humanity deserves nothing less! I demand NOTHING LESS!
    Both power and money have been conscripted by the ecocide fossil Barons… Distributed Green Energy gives both power and money back to “We the People!” With a 1.2 trillion defect reduction the interest burden the people are burdened with would be paid down by the fossil industry largely accumulated because of our dependence on Fossil Fuels! Starting to sound almost fair.

    • I share your rage. It is inequitable–and stupid–to low-ball the carbon tax rate, especially if it’s going to displace the income tax. But I also agree with Gestur that just getting something on the books is vital. If we have to start at $20/T, then that’s where we start. The strategic importance of breaking that ice cannot be overstated.

  4. David B. Benson says:

    Unfortunately a carbon tax (without appropriate import taxes) will have a strong tendency to move even more heavy industry to nations without such a carbon tax.

    Unrestricted free trade is Not A Good Thing.

    • Mulga Mumblebrain says:

      It is a good thing for Them, our plutocratic masters.

    • Yes, if we just drop the tax in place and then sit idly by.

      Tariffs, new laws about offshoring, bilateral negotiations, work at the UN–many things need to be coordinated.

      The key is to convince enough people that it’s truly urgent. We need to win over the biggest, most ornery, recalcitrant, regressive, jingoistic, right-wing authoritarian we can find. Get a handful of scientists and religious leaders to persuade a James Inhofe that the ice cap is about to collapse unless we do a WW2-style mobilization.

      Once we have that convert, things could be very different. No one is quite so zealous as a convert.

  5. rollin says:

    So basically the government wants the people to pull them out of the horribly irresponsible financial mess that they have created and abetted. What is to say that the government will be fiscally responsible enough to follow through and actually reduce the debt. More than likely they will continue to bail out their buddies and continue to sink huge amounts of new debt into foreign wars and their good old boy companies that profiteer off the wars. I say no, no, no. All money from a carbon tax should go to building wind and solar and insulating everyone’s home. It should go into research for highly efficient vehicles and promoting them. A tax that does not get rid of the problem is just more money for the government to waste on business as usual. You will never fill the current leaky bucket that is US foreign and banking policy right now, it needs to change first.

    • Mulga Mumblebrain says:

      You are completely correct, I would say. The revenues must be hypothecated to renewable research, development and roll-out, compensation for the poor and general ecological repair.

  6. rtcdmc says:

    I hate to throw a wet blanket, but there is a lot of wishful thinking in the article and the comments. First, if a carbon tax is implemented, what will the immediate effect be? Answer: flight to other localities by the affected corporations which are able to flee. From a practical political assessment, there is not enough support in Congress even to bring it to the floor. With the boom in natural gas, now would be the time to implement a modest tax for use in renewables. But it will have to be well-defined; otherwise, it will become just another government slush fund. A side note: corporations have been “people” since 1888 when the Supreme Court decided that the 14th Amendment applied to them. The legal concept in the U.S. goes back to at least 1819.

  7. Tim says:

    The solution to “flight to other localities” is as simple as it is politically unlikely: tariffs on goods produced in countries with carbon footprints – plus a bit more to compensate for shipping. Never gonna happen, I know…

    • Could happen.

      The key is that none of these policies and taxes can be implemented as a one-off event, and then passively awaited to do their magic. A carbon tax is part of a broad spectrum of social, political, fiscal, and foreign policy initiatives that would have to coordinated as if this were WW2. Which it is, times ten.

      To implement a carbon tax, we have to get enough people on board to break the vested interests. It’s a huge inertia problem. That’s why it’s important just to do it. Get something on the books.

  8. Solar Jim says:

    How is it that we institute a carbon tax when the world has an annual negative carbon tax of some half trillion dollars (IEA, 2012)? I have seen several estimates running many tens of billions per year (for fossil subsidies, NOT counting security/defense) in the US alone.

    Do we drive with our foot on the accelerator and the break at the same time?