The Congressional Budget Office Says We Need A Price On Carbon Emissions

The Congressional Budget Office (CBO) thinks putting off efforts to reduce carbon dioxide emissions risks “catastrophic” losses for the United States’ economy and society. That’s according to a new report on the economic and environmental effects of a carbon tax CBO published Wednesday.

The CBO is the group of analysts tasked with modeling and projecting the consequences of Congress’ proposed laws, so that lawmakers can have some idea of what the likely consequences of their actions will be. You may recall the CBO from the big role its scores played in the debate over health care reform a few years ago. They’re a highly respected, methodologically cautious, and strictly nonpartisan outfit that’s widely viewed as the go-to authority for refereeing policy disputes in Washington.

With China on the verge of unilaterally putting a cap on its own carbon emissions, and with wide support for a carbon tax amongst voters, politicians, industry, economists and think tanks, the fact that CBO is using its position to highlight the risks of not addressing climate change is worth paying attention to.

Now, much of their report’s content wasn’t new. It projected that a price of $20 per metric ton on carbon dioxide emissions would bring in $1.2 trillion in revenues between 2012 and 2021, and cut emissions by roughly 8 percent over the same period, which came from work CBO did in 2011 (page 205). And the debate over what to do with the revenues from a carbon tax, which much of the report is dedicated to, is also familiar.


But one thing that is noteworthy is CBO’s blunt assessment that allowing climate change to continue unchecked could be very costly to both the United States and global society:

Climate change resulting from an increase in average temperatures is a long-term problem with global causes and consequences, including effects on humans and ecosystems. Significantly limiting the extent of future warming would require a concerted effort by countries that are major emitters of greenhouse gases. Nonetheless, U.S. efforts to decrease emissions would produce incremental benefits, in the form of incremental reductions in the expected damage from climate change.

Researchers have attempted to estimate the monetary value of the future damage from climate change associated with an increase in CO2 emissions in a given year — and thus the value of the benefits from a commensurate reduction in emissions — a measure referred to as the social cost of carbon (SCC)… Those values are highest when researchers attach significant weight to long-term outcomes and when they incorporate a small probability that damage from climate change could increase sharply in the future — causing very large, or even catastrophic, losses. Delaying efforts to reduce emissions increases the risk of such losses. Given the inherent uncertainty of predicting the effects of climate change, and the possibility that it could trigger catastrophic effects, lawmakers might view a carbon tax as a reflection of society’s willingness to pay to reduce the risk of potentially very expensive damage in the future.

Even CBO’s 2009 round-up of climate change science, which focused heavily on the uncertainty built into such projections, pointed out that the worst case scenarios for climate change “even if unlikely, would justify more stringent policies than would result from simply balancing the costs of reducing emissions against the benefits of averting damages from the expected or most likely degree of warming.”

As for the question of how to structure a carbon tax, the Center for American Progress’ Richard Caperton put forward a proposal last December for a tax of $25 per ton on carbon dioxide emissions from power plants. That ought to put us on a course to reduce those emissions by 17 percent from 2005 levels by 2020, and 80 percent by 2050, though the tax would ultimately need to be expanded to the entire economy. Caperton estimated the revenue from this tax — more limited than the one envisioned by CBO — would be in the vicinity of $55 billion annually. That could be split between the roughly $20 billion annually needed to fund research and development of clean energy, deficit reduction, and support for low-income Americans.


That last aspect is especially important, because on its own a price on carbon has a regressive effect, imposing more costs on the poor and the working class than the well-off. Reductions in the payroll tax, or refundable income tax rebates, would do the most good, mainly because they target support to the very people who would most need help shouldering higher energy costs. But CBO’s new report also found that a price on carbon would reduce overall growth slightly by reducing incomes throughout the economy, and by working through income taxes those two options would counteract that drag.