I was ever so briefly at a conference on pricing carbon this weekend at Wesleyan (I was a moderator for a session). The panelists were committed to the same goal (reduced CO2 emissions) so the discussion focused on the issue of regulatory design and policy instruments. Of the competing approaches—cap-and-trade, cap-and-dividend, and a straight carbon tax—the carbon tax, in my opinion, makes the most sense.
By way of background, I find the data on global climate change pretty persuasive even if we accept that there is a fair amount of uncertainty. Given the benefits of reducing CO2 emissions, reducing dependency of foreign oil, etc., a transition to less carbon-intensive fuels and processes makes sense even if we determine at some point in the future that the environmental risks of climate change were less than we currently believe them to be.
Given the impossibility of establishing property rights over climate stability, the kinds of free-market environmentalist approaches that many find appealing would seem inapplicable. Thus we turn to other kinds of policy interventions.
Cap-and-trade worked quite well for acid rain. There is little question that Title IV of the Clean Air Act Amendments of 1990 created an amazingly cost-beneficial approach to the problem. But CO2 is far more complicated for a number of reasons and it is questionable that caps could function without offsets, which open the door to endless gaming. The carbon tax, in contrast, is a simple and transparent means of managing a negative externality.
A carbon tax would gradually increase the tax per ton of CO2, thereby making less carbon-intensive forms of fuel and processes more price competitive. Current proposals require revenue neutrality. Some suggest returning 100% of the revenues on a per capita basis via electronic transfers, thereby limiting the opportunities for transfer seeking and gaming the system (both of which would be ubiquitous in a cap scheme with offsets or any efforts to divert some of the funds to a green industrial policy). Others make the case for “tax shifting” (e.g., using the projected $500 billion in carbon revenues to eliminate those that create disincentives to investment or are overly regressive). Obviously, one could combine dividends and tax shifting. It would be prudent to combine the carbon tax with the immediate elimination of all subsidies for fossil fuel production. Of course, it would be a major innovation for US government to stop subsidizing the very activities we are trying to regulate….but I digress.
Regardless of how one uses the resources, there is a major hurdle: taxes are taxes (even if we call them “fees”) and in this political environment one might suppose that any proposal for new taxes would be DOA.
But not necessarily.
There is growing recognition of the huge fiscal crisis on the horizon. There is literally no hope of avoiding it through attacks on “waste, fraud and abuse,” earmarks, and domestic discretionary spending. Yes, any of us could make the intellectual case for massive entitlement cuts or restructuring. But there is little evidence that a majority of either party will ever make the case and endure the political costs associated with substantial revisions in Social Security and Medicare. So we turn, necessarily, to revenues. Why not frame a carbon tax as a means of shoring up the unfunded portion of Social Security and Medicare without significant cuts—and thereby avoiding an eminent fiscal collapse.
We know that existing federal trust funds are not a store of wealth. The trick would be to assure that 100% of the revenues were placed in a real trust fund with real assets until the unfunded liabilities were reduced to manageable levels. At that point—assuming that point ever arrived—decisions could be make to pay down the debt. None of this would preclude future reforms (indeed, they would likely remain necessary given the magnitude of the gap).
As a means of protecting existing entitlements, it might be attractive to the AARP and members of both parties who would like to find some means of avoiding the difficult decisions before us. As a means of reducing CO2 emissions, it would be attractive to environmentalists and younger voters (who would also be attracted by the beneficial impacts on entitlements they may never see under current conditions)?
Could the carbon tax provide a foundation for a potent grey-green coalition committed to fiscal and environmental sustainability?