Report: Carbon tax could halve deficit

Taxing carbon emissions could raise enough money to eventually cut the deficit in half, but policymakers would face tough questions about whether to use the cash to brighten the fiscal outlook or tackle other needs, a report finds.

Carbon tax proposals to help battle climate change are politically dead in Congress right now. But the Congressional Research Service overview nonetheless arrives at a time of renewed interest in the idea from some policy wonks, Democrats, and former GOP lawmakers.

The report finds that imposing an escalating fee that starts at $20 per metric ton could reduce the projected 10-year budget deficit by more than 50 percent, from $2.3 trillion to $1.1 trillion.That estimate relies on the Congressional Budget Office’s (CBO) “baseline” deficit projection.

But the report notes that the same carbon tax would have a much smaller impact on the deficit — cutting it about 12 percent — under CBO’s “alternative” scenario that forecasts a much bigger shortfall.

The report, relying on CBO analysis of carbon costs under a hypothetical cap-and-trade program, estimates that the escalating $20-per-ton tax could raise $88 billion in 2012, rising to $154 billion in 2021.

However, deficit reduction is just one possible use for the cash.

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CRS notes that policymakers would face “key trade-offs” in weighing whether to minimize the costs of the tax on society overall “versus alleviating the costs borne by subgroups in the U.S. population or specific domestic industries.”

“Economic studies indicate that using carbon tax revenues to offset reductions in existing taxes – labor, income and investment – could yield the greatest benefit to the economy overall. However, the approaches that yield the largest overall benefit often impose disproportionate costs on lower-income households,” the report finds.

The report delves into other potential uses instead of devoting all carbon tax money to attacking the deficit.

“If Congress were to consider a carbon tax system, a key debate would likely involve the degree to which carbon tax revenues would be returned to households to alleviate the expected financial burden imposed by the carbon tax,” it states.

Also, the tax could hurt energy-intensive manufacturing and other industries that face competition from abroad, so they might need a piece of the pie.

“Policymakers could alleviate this burden through carbon tax revenue distribution or through a border adjustment mechanism. Both approaches may entail trade concerns,” the report notes.

The notion of a carbon tax also raises other tough questions, such as whether it’s levied on sources of fuel like oil production and coal mining, or other points, such as emissions from oil refineries and power plants that burn coal and natural gas, or “downstream” energy uses such as industrial plants and vehicles.

For now, it’s an abstract debate as climate legislation remains frozen on Capitol Hill, where Republicans are seeking to roll back the Environmental Protection Agency’s existing power to regulate carbon emissions.

Cap-and-trade or carbon tax bills face gigantic political hurdles in the current Congress and likely the next one, too.

CRS notes — in somewhat clinical terms — that carbon tax proposals would face strong pushback from powerful industries.

“Certain stakeholders are likely to exercise strong opposition to a carbon tax. These include energy-intensive manufacturers, farmers, and regional energy interests — especially those whose asset values may fall with expected impacts on profitability of owned or leased coal and oil resources,” the report states.

However, there remains an undercurrent of interest in a carbon tax, which advocates call a more straightforward and efficient way to address carbon emissions than cap-and-trade proposals.

Supporters and policy analysts have held a series of meetings to discuss the idea, which has support from some lawmakers.

Rep. Jim McDermott (D-Wash.) introduced carbon tax legislation in August.

Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) joined with former GOP Reps. Sherwood Boehlert and Wayne Gilchrest in a February Washington Post op-ed that said, “We could slash our debt by making power plants and oil refineries pay for the carbon emissions that endanger our health and environment.”

It called broadly for a “market mechanism such as the sale of carbon allowances or a fee on carbon pollution to lower emissions and increase revenue.”

In addition, former GOP Rep. Bob Inglis (R-S.C.) is using a new role at George Mason University to advocate for his idea of a “revenue-neutral” carbon tax under which taxes on emissions would be offset by reductions in other rates.