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The carbon tax: why a bipartisan idea is still held up

In the quest to reduce greenhouse gas emissions, the two most familiar approaches are tightening government regulations—on vehicle fuel economy, for instance, or lightbulb efficiency—and changing our personal habits to conserve energy voluntarily.

But when economists look at a problem at such a large scale, they think about how to harness market forces to push the economy away from carbon-based energy. The argument is that if you increase the price of fossil fuels, then technology and behavior will shift over time.

The concept isn’t new, but it has recently gained some political momentum thanks to a new twist.

The notion of taxing problematic goods dates to the 1920s, when British economist Arthur Pigou observed that some products had social costs that weren’t accounted for in prices set strictly by supply and demand. He suggested what became known as “Pigovian taxes” on goods and services such as alcohol and tobacco, which were legal but the government might want to discourage people from using.


In the case of carbon, the Pigovian approach was first debated by economists in the late 1980s and early 1990s. Supporters say a single, uniform tax in which fuels are taxed based on how much carbon they contain, or on the amount of carbon dioxide emitted when the fuel is burned, would cut emissions, and encourage conservation and the development of green energy more efficiently (and less expensively) than government mandates or patchworks of subsidies. In 2012, researchers at MIT’s Joint Program on Global Change analyzed the idea and concluded that a $20 per-ton fee on the carbon content of fossil fuels, implemented in 2013 and increasing 4 percent a year, would by itself cut emissions to 20 percent below 2006 levels by mid-century. (That’s a sizeable reduction, if only a step toward the what the Intergovernmental Panel on Climate Change suggests is needed to fend off serious climate trouble: an 80 percent drop from 1990 levels by 2050.)

But the scheme runs into one deep, common-sense objection: Like it or not, America’s economy runs on carbon—more than 80 percent of our energy comes from fossil fuels. Taxing carbon would make everything more expensive, slow economic growth, and put people out of work. That $20-per-ton tax the MIT researchers analyzed would pull about $1.5 trillion out of the economy in its first decade.


Hence the twist: What if you just returned all the carbon tax money to the economy? The revenue could be returned to taxpayers with dividend checks, or it could be used to lower other taxes on individuals or businesses. Either plan would effectively be taking money from the biggest polluters and plowing it back into the economy.

In the past few years, this so-called revenue-neutral carbon tax has garnered support from a wide spectrum of political and economic interests. It includes climate scientists such as James Hansen, who sits on the advisory board of a national carbon-tax advocacy group called Citizens’ Climate Lobby; but also economist Arthur Laffer, who was Ronald Reagan’s economic policy adviser; former Republican treasury secretary Henry Paulson; and even ExxonMobil. While many liberal supporters of “revenue-neutral” carbon-pricing would be just as happy if the money came from a so-called cap-and-trade scheme (setting a cap on emissions, and then auctioning tradable emissions permits), there’s very little conservative enthusiasm for mandating a strict cap on emissions.

Despite the growing and bipartisan support for raising the price of carbon among economists and policy wonks, it’s still a political nonstarter for many conservatives for several reasons. Many, of course, simply aren’t convinced that climate change is a serious threat. They also argue that unilateral emissions cuts by the United States (responsible for about 15 percent of global emissions) would hurt national competitiveness while having little effect on global climate this century. And they scoff at the idea that the government could actually be trusted to return tax revenue.


“It’s a sucker’s game for conservatives,” says David Kreutzer, a research fellow in energy, economics, and climate change at the Heritage Foundation. “In [Washington] D.C., I’ve come to realize that a revenue-neutral tax means they promise to spend all the money.”

As a result, in the past five years, only two bills advocating a carbon tax or emissions cap have had Republican sponsors. One of those was from Bob Inglis, a congressional representative from South Carolina, who introduced the “Raise Wages, Cut Carbon Act” in 2009 and lost his seat to a primary challenger in 2010. Two years ago, Inglis founded the Energy and Enterprise Initiative to make the conservative case for a carbon tax, arguing that a tax that leaves solutions to the marketplace is preferable to stricter government regulation. “Free enterprise can fix climate change, because innovation can happen rapidly, and it will be driven by consumer demand, not by dictate,” Inglis says.

Writing in support of the revenue-neutral carbon tax in a 2009 issue of the Eastern Economic Journal, the conservative Harvard economist N. Gregory Mankiw claimed that many Republican politicians are “privately convinced” about the merits of such a policy but “feign opposition” for political expediency.


Inglis agrees, and says pricing carbon doesn’t stand a chance in the United States without more mainstream pressure to act. “We think Congress doesn’t listen to us, but the truth is that they listen very intently,” he says. “And they’re scared to death of us.”