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With global warming having been resurrected as a political topic of conversation after Hurricane Sandy, both the Brookings Institution and the Congressional Budget Office (CBO) have issued papers on how a United States federal carbon tax could be structured, and how such a tax might fit into future deficit-reducing tax reforms.
The Brookings Institution says that the US needs to reduce its budget deficit and will require significant new revenue to do it, while it also needs to clean up its economy and invest in energy-system technology development. It recommends therefore that a modest carbon tax should be introduced in order to help the environment and stabilize the country’s finances.
Specifically, it recommends that Congress and President Obama should move to design and implement a carbon fee system that would establish a carbon levy of roughly USD20 per ton of carbon dioxide emissions.
It points out that according to the MIT Joint Program on the Science and Policy of Global Change, a carbon tax starting at USD20 per ton and rising at 4% annually per year in real terms would raise on average USD150bn a year over a 10-year period while reducing carbon dioxide emissions 14% below 2006 levels by 2020 and 20% below 2006 levels by 2050.
The Institute would also set aside, in an independently managed fund, at least the first USD30bn of revenue annually for clean energy and energy efficiency developments, partly to ensure that de-carbonization proceeds rapidly and adequately. The rest of the revenue would be allocated to tax cuts and deficit reduction, as well as rebates to affected low-income households, as determined by Congress and the President.
In turn, the CBO has picked up the question of how a carbon tax could be structured so as to reduce its regressive effect on those on low incomes, which arises from the fact that prices of goods and services will rise based on the amount of greenhouse emissions associated with their production and use. Goods that lead to relatively high emissions, such as coal-fired electricity, would see larger price increases than goods that have relatively low emissions, such as services.
“While those changes in relative prices are essential to the success of the programme,” the CBO adds, “because they provide incentives for businesses to produce goods in a manner that result in lower emissions and for households to reduce consumption of energy-intensive goods that cause high emissions, those price increases would impose a burden on low-income households.”
The CBO confirms that there are several policies that policymakers could consider for offsetting those tax-induced costs borne by low-income households, and its paper proceeds to evaluate two broad policy groupings to that end.
“One group of options would affect large segments of the economy, for example by reducing payroll taxes,” the CBO suggests, “and the other group of options would be targeted at low-income households, for example by providing an additional payment to households currently receiving electronic transfer benefits.”
However, while a carbon tax is being talked about again, it does not mean that it is likely to be introduced in the foreseeable future. While it has been indicated that the White House has no plans to formulate a carbon tax in the short-term, and that it would, in any case, be up to Republicans within the House of Representatives to initiate any such proposal, it is reported that there is little interest from those Republicans at present.
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