10/20/2013 by James Handley
A new paper, “Deficit Reduction and Carbon Taxes: Budgetary, Economic, and Distributional Impacts” by economists at the Washington, DC think-tank Resources for the Future, finds that a $30/ton tax on CO2 pollution would reduce U.S. emissions 16% by 2025. The report concludes that dedicating the carbon tax revenues, estimated at $200 billion each year, to “down payment” of the federal budget deficit offers greater economic-efficiency benefits than other revenue-return options. Moreover, according to RFF, using the carbon tax revenues to pay down the deficit would especially benefit the young, by curbing global warming and its associated future costs, and by reducing tax burdens of today’s young people far into the future.
Using a new intergenerational economic model, RFF economists examined different ways to use revenue generated by carbon taxes, revealing the impacts of those choices across the age spectrum of the U.S. population. They modeled four scenarios: three in which the carbon tax revenues are used to reduce taxes on 1) capital, 2) labor, and 3) sales of goods, and a fourth in which the revenues are returned in lump sum “dividends.” RFF found the differences in annual aggregate welfare among the four options to be relative small ― less than 3 percent. Interestingly, returning revenue as lump-sum dividends offers a slightly more progressive income distribution than a labor tax shift.
More striking differences are revealed across the age spectrum: people who are now too young to vote would benefit most from a carbon tax used to fund deficit reduction, according to RFF. The authors conclude: “[E]nacting such a policy [a carbon tax used to pay down the deficit] will be politically difficult unless current generations are altruistic” enough to act now to curb global warming and to pay down deficits, both of whose impacts will be greatest on the young. That’s an understatement.