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We Could Cut the Deficit in Half Just with a Carbon Tax

J. Mijin Cha

A new report from the Congressional Research Service looks how a carbon tax could be used for deficit reduction or other fiscal measures. The CRS projects that a tax rate of $20 per metric ton of carbon dioxide would generate approximately $88 billion in 2012 and up to $144 billion by 2020. This would be enough to cut the 10-year budget deficit in half under the 2012 baseline CBO projection. Under the alternative fiscal scenario, however, this amount of revenue would reduce the 10-year budget deficit by 12 percent.

The report also looks at other ways the revenue could be used, such as offsetting any increase in energy costs for low-income households or helping mitigate costs for carbon-intensive, trade-exposed industries while they adjust to a lower-carbon reality.

The CRS report also addresses the political reality that a carbon tax would face strong opposition from the fossil fuel industry. Despite this, the idea seems to be gaining hold as carbon tax legislation was introduced by Rep. Jim McDemott in August and there is increasing bipartisan support for the general idea of shifting our tax base to taxing bad behaviors, like pollution and consumption, and specifically for a carbon tax. Not to mention several countries have adopted a carbon tax.

In general, the idea of taxing pollution is a good one. We’ve covered how it is politically popular, helps change negative behaviors, and raises revenue that can be used to either help mitigate increases in costs or invested in expanding emerging alternative energies.

There are many variables that would go into a carbon tax structure and the CRS report touches on a few. It would be a big undertaking to implement but ultimately, the benefits to the economy and to the climate would far outweigh the costs.