Win-Win-Win: The Case for a Carbon Tax

As deficit talks continue to make little progress, we should revisit how a carbon tax would not only help raise badly needed revenue but could also be essential to fighting the climate crisis. A recent Congressional Research Service report found that a tax of $20 per metric ton of carbon dioxide would generate enough revenue to cut the 10-year budget deficit in half. This price is actually less than the carbon tax in British Columbia, which rose to $30 per metric ton of carbon dioxide in July 2012. Not only has BC’s carbon tax resulted in substantial decline of greenhouse gases, it has not negatively impacted economic growth -- the province has slightly higher GDP growth than the rest of the country.

As I wrote yesterday, a carbon tax is a better approach to emissions reductions than an emissions trading scheme. With emissions trading, carbon credits are often priced too low and/or too many credits are given away. As a result, the market-based emissions trading has not been as successful as hoped. A carbon tax, on the other hand, would work to dissuade bad behavior (as long as the tax is high enough) and also provides a revenue stream. It also shifts the burden of pollution mitigation to the polluter and away from the public.

In fact, on a broader level, we should shift our entire tax structure from taxing good things, like income and savings, to taxing bad things that create costs for society, like pollution. Taxes serve two purposes; raising revenue and dissuading bad behavior. We should encourage higher incomes, investment, capital formation, and savings -- but taxing those things can have the opposite effect. Likewise, currently the costs that accompany pollution are borne by society and not by the companies generating the pollution. Shifting the cost burden onto companies that pollute dissuades the bad behavior and would raise revenue to offset the costs imposed by the pollution.

Finally, while the revenue raised by a carbon tax could help with deficit reduction, some of those funds could also be used to offset any increase in energy costs for lower-income households and investing in transitioning our economy to a green economy. By itself, a carbon tax isn’t enough to bring about the emissions reductions we need. We still need to develop and advance energy alternatives that will replace our heavy dependence on fossil fuels.

We've all heard of win-win policies. Well, a carbon tax is win-win-win policy: It would cut deficits, lower greenhouse gas, and also reduce taxes on productive behavior. Not many ideas kicking around Washington accomplish this many goals. So why isn't President Obama embracing a carbon tax?