How A Cornucopia of Prosperity Can Flow From Carbon Tax

by Craig A. Severance, via Energy Economy Online

Right now the climate and energy community is stuck.  There is a growing consensus, including among conservatives, that it is finally time for a carbon tax.  Yet, no politician — especially President Obama — seems ready to advance the proposal.

The previous proposal to do something about climate — cap&trade — failed to gain wildly popular public enthusiasm (and we need this level of support).  While economists thought cap&trade was the best way to address the carbon pollution that is causing extreme climate disruption, it wasn’t seen as “giving back” enough to the public.

We Need Work not Wonk.  A recent American Enterprise Institute conference on a carbon tax showed broad support for the idea among both Republicans and Democrats.  Conservatives have long wanted to lower taxes on earnings, and many have called for taxing consumption or pollution to achieve this.  A properly structured carbon tax can also bring investment and jobs, and effective action on climate.

However, the conference showed how quickly the discussion can fall into a “wonky” technical morass of various ways to carry out a carbon tax.  There are a host of different and complex ways to assess a carbon tax — but that is not where the discussion needs to begin.

To gain wildly enthusiastic public support, we must first discuss the economic prosperity that can flow from a carbon tax.

No “Bitter Pill.” As much as Americans now want action on extreme climate disruption, the public just won’t take any “bitter pill” to solve the problem.

Climate economists know preventing loss of life and economic damages from superstorms, droughts, floods, and wildfires more than justifies taking action now.  This is all very true and rational, but President Obama knows the public wants action on the economy.

The nation’s main focus is still “jobs, jobs, jobs”.  The President has his ear keenly attuned to the public voice, and he is right to insist economic prosperity must flow from any climate proposals.

The price of climate action will be acceptable if it is used to deliver what the public wants.  Salespeople never begin by focusing on price, but rather strive to meet what the customer wants.  Once the customer decides they want something, they are willing to pay the price to get it.

To gain wild enthusiasm from the public, we must learn to talk about climate action smartly, and show that action on climate is also a way to achieve very popular and tangible economic proposals the public wants.

Fortunately, this won’t be hard.

Top 10 Ways Economic Prosperity Can Flow From Carbon Tax:

Depending on the level of tax placed on carbon and the amount of revenues thus raised, the following “Top 10″ benefits can flow to the public:

10.  Spur New Automobile Buying. With higher prices at the pump, people want more fuel efficient vehicles.  One fair use of some of the funds from a carbon tax would be an improved “Cash for Clunkers” program, basing cash rebates on percentage improvement in fuel economy. This will create auto industry jobs, and get efficient cars on the roads faster.

9.  Build Needed Projects. Another fair use of carbon tax revenues is to repair, and to prevent, damages from extreme weather events.  While pundits have said GDP may now rise with rebuilding from Superstorm Sandy, where are the tens of billions of dollars needed?  Coastal areas also now want to prevent damage from future climate disasters.  Seawalls, levees and other structures are needed just to protect against the global warming we’ve already “baked in”.  On the positive side, communities will use rail projects to help us prosper without burning so much oil.  With these projects, plus private utility spending to convert electric generation to renewable energy, construction jobs will be a major benefit flowing from action on the climate.

8.  Better Buildings Soon. People want to live and work in more comfortable and energy efficient buildings, but most Americans are too “maxed out” and underwater to finance the needed energy improvements.   Block grants of billions of dollars in “seed funds” to states can help them set up revolving-fund special assessment districts to finance energy efficiency and renewable projects. Because the loans are repaid by energy savings, only initial seed funding would be needed. This same Federal seed funding can be used to encourage (instead of failed attempts to require) states to pass strict energy building codes for new construction.  For instance, if a state agrees to pass a strict energy code on new buildings, its amount of seed funding for retrofits would be quadrupled.  Putting money in the hands of building owners to do needed energy work can be a major tool for job creation in local communities across America. 

7.  Raise Revenue and Break the Debt Junkee Habit. For the past several years, about one-third of the total “Want-List” funded by the Federal government has been paid with borrowed money.  New revenue is needed, but of course everyone wants a tax that can be “paid by the other guy”.  A carbon tax fits this, because it offers everyone the option to avoid paying it by changing their behavior.  Yet, according to the Brookings Institution, even a very modest carbon tax could raise an average over 10 years of about $150 billion per year, while cutting carbon emissions significantly. (Funding this full “Top Ten” list would require a somewhat more serious carbon tax, but also includes more economic benefits.)  An energy and climate plan would also reduce our trade deficit — by cutting oil imports and making U.S. manufacturers more competitive — and thus keep more dollars circulating in the U.S. economy, where they are taxed.

6.  Stimulus Effect Now. In the “Magic Math” of Washington, a new proposal is not considered to add to the Federal Deficit so long as it pays for itself over the next 10 years.  In other words, an overall proposal, such as these Top Ten Ways, could be structured to provide a “Stimulus Effect” right now.  Yet it can still be Budget Neutral so long as it pays for itself over 10 years.  Unlike the usual Washington smoke-and-mirrors that depend on outrageous assumptions about growth and other tricks, a carbon tax actually would be set to increase annually and thus could finance a stimulus effect now but truly be balanced over a 10 year period. 

5.  Help U.S. Manufacturers Compete. If the carbon tax is properly structured, imported products will also be assessed based upon the carbon pollutants used in their manufacture and the fuel used to get them to American borders.  This assessment on imports will help U.S. manufacturers compete against Chinese and other imports using dirty coal to make them, and barrels of oil to get them here.  It will also cut global carbon pollution, as much of the pollution by exporting nations is not for their own use but to ship us products.

4.  Give Employers a Tax Break. To gain the support of business, a major tax break should be given to employers, to make it easier to hire U.S. workers.  Extend the “Payroll Tax Holiday” to include the employer’s share of payroll taxes, not just the employee’s share.  Because this is laser focused on jobs, this “employer-friendly” tax break should take priority over cutting tax rates on corporate profits — profits often obtained by slashing workers.

3.  Extend the Payroll Tax Holiday on Wages. Giving back revenues collected from the carbon tax with every paycheck, the current Payroll Tax Holiday of 2% of wages for the employee share of Social Security Taxes should be extended, adding about $1,000 a year to the average family’s take-home pay.   We can thus achieve a long sought goal of conservatives — using taxes on consumption (of a pollutant) to fund a tax break on earnings. To be anti-regressive, the tax break has to be on payroll taxes, because unlike income tax, payroll taxes are paid by even the poorest of workers.  Cutting Social Security taxes naturally raises concerns over the solvency of Social Security, but because this Payroll Tax Holiday would now be funded, it could be structured so as not to affect the program.

2.  JOBS, JOBS, JOBS. All the benefits in the Top Ten Ways will flow out to create more jobs.  Auto industry jobs, construction jobs, energy efficiency and renewable energy jobs (industries more job-intensive than the fossil fuels they would replace), railroad and mass transit jobs, and jobs throughout the economy when employers and wage earners spend their extra cash, will all put Americans to work.  A more effective package of measures for job creation would be hard to imagine.

AND FINALLY — THE #1 WAY A CARBON TAX CAN FLOW BENEFITS TO THE ECONOMY:

1.  Fight Global Warming! Global warming is showing us the true cost of “cheap energy” from coal and other fossil fuels.  If we don’t do something about this, we will keep getting slammed by superstorms, droughts, floods, sea level rise, mass extinctions, wildfires, and crop failures.  Aren’t we sick of extreme climate disruption already?? Can we really take more of this without doing something about it!?

The very thing that makes a consumption tax attractive to conservatives — our ability to choose NOT to pay the tax by choosing NOT to consume the taxed product — is what can make a carbon tax effective in fighting global warming.  By taxing carbon, people will choose not to pay the carbon tax by reducing their consumption of carbon-intensive fuels and products.

It is highly likely we will have to tinker with the level of carbon tax to get this right.  This “Top Ten” list, however, shows us where the monies we collect from a serious carbon tax can go.

They will be given back to us, to help us achieve economic goals we could not achieve without it.

Craig A. Severance, CPA is co-author of The Economics of Nuclear and Coal Power (Praeger 1976), and former Assistant to the Chairman and to Chief Commerce Counsel, Iowa State Commerce Commission. This piece was originally published at Energy Economy Online and was reprinted with permission.