Friday, April 13, 2012

How I Would Overhaul the U.S. Tax Code - Part IV: The Carbon Tax

Continued from Part III.

The Mechanics of a Carbon Tax

Carbon taxes have been successfully implemented in many European countries. However, most of these countries do not rely on their carbon taxes as a primary source of revenue for the government as I am proposing. If the payroll tax were repealed, it would leave a hole in the budget of approximately $1 trillion. In order to raise this amount of revenue from a carbon tax, the U.S. would have to tax carbon at a rate of roughly $175 per metric ton emitted. Most European countries do not have a such a steep tax on carbon.
However, Sweden started putting a tax on carbon comparable to what we would need almost two decades ago and has continued to experience stronger than average economic growth ever since. They also have a rate of carbon emissions per capita that is about one fourth of the U.S. average.

If the U.S. achieved Swedish rates of carbon emissions, worldwide carbon emissions would drop by 15 percent. Sweden levies its carbon tax upstream, which leaves the bulk of responsibility on industry rather than individuals. The U.S. should follow the successful Swedish model except for all of the exemptions in their tax program. We will not need exemptions because businesses and consumers will experience a windfall from the lifting of the payroll tax and therefore will be able to adjust to the higher prices of carbon-intensive energy. In addition, a multiyear transition period would allow for a slow phase out of the payroll tax in concert with a gradual phase in of the carbon tax.

Many are concerned that a carbon tax would make our economy less competitive with China and other nations that may not impose a similar price on carbon emissions in their own countries. Over the long term, countries that depend on dirty, unsustainable fossil fuels will inevitably fall behind those who innovate new energy solutions. But over the short term, critics of a carbon tax for competitive reasons are essentially right. That is why the U.S. must pair a carbon tariff with its carbon tax.

Such a tariff could be designed to comply with WTO rules. There are rough analogues in two different places: sales taxes apply to foreign imports and domestic goods equally, and the Montreal Agreement that regulates the Ozone layer pollutants included a trade adjustment component. If handled delicately, such a tariff might push the world closer to a global agreement on climate change action. Such a policy would not be very extreme, as no less a luminary than Nobel Prize winning economist and international trade expert Paul Krugman has strongly endorsed a carbon tariff paired with domestic pricing of carbon. The revenue from a carbon tariff could be used to lower our domestic carbon tax rate marginally and to fund a renewable energy infrastructure.

The Necessity of Pricing Carbon

The scientific community has been very clear about the enormous risks posed by human-caused climate change. Societies continue to heedlessly burn fossil fuels at their own peril. As the world leader in per capita carbon emissions, the U.S. has an awesome responsibility to set an example and end our dependence on carbon pollution once and for all. The most obvious way forward is to craft public policy that makes carbon much more costly to emit over time.

Whether or not this country decides to overhaul its tax code, it must put a price on carbon if it is serious about addressing the great, unavoidable challenge of our time. I am simply suggesting that rather than add a carbon tax to the system on its own, replace the payroll tax designed for the economic realities of the 1930s with a pollution tax tailored to the world of today. In this way, instead of imposing new economic costs onto individuals and businesses, we just shift the costs off of wage labor and onto unsustainable energy production and use.

Continued in Part V.

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