COMMENTARY: Politico- Carbon tax offers win-win-win

Sunday, August 26, 2012
Politico   (Browse all news)


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By: John M. Reilly and Sebastian Rausch

This time last year, Washington’s AAA credit rating was downgraded, as Congress held hostage an agreement on a debt ceiling increase while looking for a long-term debt reduction plan. A year later, not much has changed.

Congress is no closer to reaching consensus on reining in our nation’s debt. The Bi-Partisan Tax Commission laid out the harsh reality: Closing the deficit would require both tax increases and cuts to key programs like Social Security.

Though some of these difficult changes may be inevitable, what if we could avoid some tax hikes and spending cuts? And did it while stimulating the economy and cutting pollution and oil imports? A carbon tax would do just that, according to our new study.

The Congressional Budget Office found that a tax on carbon dioxide, starting at $20 per ton, could raise $1.25 trillion over the next decade. Our research puts those numbers higher — at $1.5 trillion. With that money, Congress could extend the Bush income tax cuts that are due to expire on Dec. 31, and also avoid serious cuts to social programs. Replacing this with revenue from a carbon tax would also modestly improve the economy.

Lowering taxes and maintaining funding for social programs would give Americans more money to spend – boosting the economy. This is particularly true in the short term – if tax cuts and spending are skewed toward lower income households, which spend more of their income, stimulating weak consumer demand.

On the other hand, cutting these programs – as well as raising other taxes – would drag down our economy. So much so that the loss would more than offset the cost of a carbon tax.

This win-win alone should be enough for our leaders to put a price on carbon, forcing fossil fuel users to pay a tax based on the amount of emissions they produce.

But there’s another win we’d get at no extra cost: a win for our future health, security and prosperity.

This carbon tax plan, our research shows, would cut emissions by more than 20 percent by 2050, while keeping oil imports from rising. With this economically beneficial approach, the U.S. could lead the way to a global solution for carbon emissions rather than stand in the way.

A carbon tax would also help shift the market to clean technologies like solar, wind and other low-carbon energy sources. This shift would happen in a way that makes economic sense: By making dirtier sources more expensive and raising revenue rather than spending it through narrow tax incentives.

By encouraging low-carbon energy, a carbon tax could cut our use of foreign oil by 10 million barrels a day by 2050. It would also give U.S. consumers and businesses the flexibility to choose technologies that save energy and money – boosting sales of more fuel-efficient cars and other goods. With greater efficiency, fuel and energy costs could actually go down – not up – as the U.S. economy turns from spending and borrowing to saving and investing in our future.

A carbon tax isn’t a new idea in Washington. In fact, it has support from both sides of the aisle. Conservative economists — like Mitt Romney’s adviser Greg Mankiw and Ronald Reagan’s former adviser Arthur Laffer — agree: When it comes to the pure economics, a carbon tax makes the most sense. Yet partisan gridlock and the political fear of anything labeled “tax” has blocked sensible solutions.

There are usually hefty tradeoffs and hard-set winners and losers in politics. This time, however, that doesn’t have to be the case.

With these benefits to our economy, our environment and our security, a carbon tax is the winning solution that our nation needs to carve out a prosperous future.

John M. Reilly is co-director for the Joint Program on the Science and Policy of Global Change at the Massachusetts Institute of Technology and a senior lecturer at MIT’s Sloan School of Management. Sebastian Rausch is an assistant professor of energy economics at ETH Zurich and contributes to research at the Joint Program on the Science and Policy of Global Change at MIT.

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