CBO: Carbon tax an option to avoid 'catastrophic' outcomes

A carbon tax, while politically divisive, has continued to surface as an option for raising revenues as Congress dives into discussions about overhauling the federal tax code.

Last month, a Senate Finance Committee report suggested the carbon tax was one of many policy tools available to tax-writing panels.

While championed by some climate policy wonks and even some conservative groups looking to fill the Treasury Department’s piggy bank, the concept hasn't gained much traction in Capitol Hill.

Republicans and some centrist Democrats have rejected the idea of a carbon tax, saying it would impose burdensome costs on the economy. The GOP-controlled House would block a carbon tax measure, and Republicans would likely be able to filibuster a bill in the Senate.

Democrats, though, say the benefits of reducing medical costs from improved public health and stunting climate change would offset any negative economic effects from a carbon tax.

For its part, the White House has ruled out pursuing a carbon tax.

The report noted a carbon tax would help slow the effects of climate change while also adding to Treasury’s coffers. It also said reduced emissions would improve public health, in turn lowering national healthcare costs.

But imposing a carbon tax would raise the cost of fossil fuels and goods made in energy-intensive industries — everything from plastics to aluminum. It also would take a larger chunk out of lower-income residents’ checkbooks, as well as those of people who rely heavily on fossil fuel-generated electricity.

The key, therefore, is how to implement the tax and use the revenues, the report said.

The CBO report noted the economic effect would depend on several factors, though it did not perform an analysis on any of them. They include the tax rate imposed and whether Treasury would redistribute revenues to lower-income residents who would be most affected.

Policymakers would also need to decide whether to tax at the point of extraction or at the point of emissions.

The CBO report recommended doing so at extraction, saying it “would have the greatest likelihood of minimizing compliance costs and maximizing coverage.”