A Win for Energy and America
By John Reilly
THE NEW - STILL DIVIDED - CONGRESS reconvenes this month, and its first order of business is the looming federal deficit. The president made his desires clear in his victory speech: "We want our children to live in an America that isn't burdened by debt . that isn't threatened by the destructive power of a warming planet." Meanwhile, congressional leaders recognize the need for compromise.
Some suggest that closing the deficit would require both budget cuts and increased revenue. The riddle in any tax reform is the need to reduce the tax burdens on wage earners and investors, while generating revenue for essential government services. A carbon tax might answer this riddle. It could help avoid some tax hikes and spending cuts, while stimulating the economy, securing America's energy future, and giving utilities and energy companies greater certainty.
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 - while cutting emissions by more than 20 percent by 2050. With the money raised, Congress could maintain income tax cuts and avoid serious cuts to social programs.
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 and raising other taxes would drag down our economy, so much so that the loss would more than offset the cost of a carbon tax.
When it comes to the pure economics, a carbon tax makes the most sense. But what is a win for our economy is also a win for the energy industry. For years, many in the industry have called for a clear, market-based approach to secure America's energy future. Instead, they've received mixed signals and patchwork regulations. Meanwhile, narrow tax incentives have allowed the government - not the market -to choose winners and losers. This approach has been inefficient and ineffective.
A carbon tax, if part of broad tax reform, could bring an end to this approach, providing certainty to utilities and energy companies and allowing these businesses to make the investments needed to usher in America's clean, prosperous and secure energy future. A carbon tax would provide a clear market signal for U.S. businesses and consumers, giving them 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.
Partisan gridlock and the political fear of anything labeled a "tax" may make this sensible solution seem impossible. But because it makes the most economic sense, it is receiving support from both sides of the aisle.
As the chairman of President George W. Bush's Council of Economic Advisers, Greg Mankiw, has said, "Economists have long understood that the key to smart environmental policy is aligning private incentives with true social costs and benefits. That means putting a price on carbon emissions, so households and firms will have good reason to reduce their use of fossil fuels and to develop alternative energy sources." There are usually hefty trade-offs and hard-set winners and losers in politics. This time, that doesn't have to be the case.