A carbon tax of $25 per ton of emissions would cut the deficit by $1 trillion over a decade, according to the Congressional Budget Office (CBO).
The finding was part of a report CBO just put out detailing 103 different ways — in terms of both cutting spending and raising revenue — the U.S. government could reduce its deficit. At a total haul of $1.06 trillion by 2021, the carbon tax was far and away the biggest deficit reducer of any option listed.
It’s a policy that enjoys widespread support amongst politicians, industry spokespersons, economists, and polling of the general public. But it’s also on the legislative back-burner — save for efforts by Rep. Henry Waxman (R-CA) and a handful of other concerned legislators — while the Obama Administration attempts to cut carbon emissions through the regulatory authority of the Environmental Protection Agency.
But a carbon tax would be conceptually simpler, would leave businesses free to figure out how they want to reduce their emissions, and would incentivize them to find the most cost-effective way to get those cuts. The regulatory route doesn’t provide that same flexibility, though it comes with greater certainty (as does a cap-and-trade system) in how much carbon emissions will go down. With the tax, government sets the price and then finds out how much emissions drop.
Specifically, CBO modeled a tax of $25 for every ton of carbon put out by most sectors of the economy, including electricity generation, manufacturing, and transportation. The tax would increase at a rate of two percent every year, adjusted for inflation. As a result, CBO projected carbon emissions would fall ten percent from their current level.
There would some negative consequences. Increased fossil fuel costs would push down economic growth and reduce revenues from income and payroll taxes — though CBO accounted for those other losses in its estimate. The tax would also fall heavier on low-income households, because energy use is a larger portion of their overall budgets. But if lawmakers are willing to forego the deficit reduction, CBO has also proposed options for plowing the tax’s revenue back into the economy in a way that could eliminate those impacts.
On the plus side, cracking down on carbon emissions naturally reduces other pollutants that directly harm human health. CBO cited a study that found a tax of $29 per ton would deliver a $10 to $20 boost to the economy for every ton of emissions cut, just from improved health. This same effect is largely why the estimated economic benefits of environmental regulations routinely dwarf their costs to businesses.
Now, a ten percent reduction in emissions isn’t all that impressive given the scale of the greenhouse gas problem. But the CBO also set the tax at $25 merely for illustrative purposes. A separate analysis by the executive branch already pegged the damage carbon emissions will do to the economy at $32 to $37 per ton. Other studies say the price should be $55, $83, or even $266 per ton.
Ultimately, the first and most important justification for the tax is heading off the potentially catastrophic effects of man-made climate change. Deficit reduction is a laudable goal, but hardly one the country should be pursuing while it’s still in the economic doldrums.