Carbon taxing to safeguard Earth’s climate took several major steps forward — politically and intellectually — with the introduction yesterday of the America’s Energy Security Trust Fund Act of 2009 by Rep. John B. Larson, chair of the House Democratic Caucus and fourth-ranking Democrat in the House of Representatives.

The new bill builds and improves on Rep. Larson’s 2007 bill with these provisions:

• The first-year tax rate is $15 per ton of carbon dioxide.
• The rate rises by $10/ton per year.
• After five years, that increase rate is automatically bumped up to $15/ton if U.S. emissions stray from an EPA-certified glide path to cut emissions by 80% from 2005 levels in 2050.
• To protect domestic manufacturers, the bill authorizes the Treasury Department to impose a “carbon equivalency fee” on carbon-intensive products imported from non-carbon-taxing nations.
• Clean-tech R&D and investments are eligible for $10 billion a year in tax credits.
• Impacted workers and industries are eligible for transition assistance of $7.5 billion in the first year; this is phased out after year 10 but still totals $41 billion.
• All other revenue is tax-shifted to Americans via reductions in payroll taxes.

Rep. Larson, a member of the powerful, tax-writing Ways & Means Committee, appears to have crafted his new bill to counter most if not all salient objections to carbon taxing:

• To the insistence on emission guarantees: the Larson bill responds to the “quantity-certainty” objection by virtually guaranteeing deep emission cuts. Emissions would fall to 25% below 2005 levels in 2022, according to CTC’s conservative carbon tax-impact model. If that’s insufficient, the automatic tilt to a $15 annual increment will push the 2022 reduction percentage higher (we estimate to 30%), with cuts continuing after. The average annual decline rate in that scenario matches the 2% target rate in most cap-and-trade proposals and kicks in much more quickly, due to the tax’s shorter lead time.

• To concerns about “tax-and-spend”: over the first ten years, 96% of revenues would be returned to U.S. families. The recapture percentage reaches 99% in year 15.

• To fears of eroding U.S. competitiveness: the payroll-tax reductions provide the much-sought “double dividend” of stimulating the economy while encouraging work. The carbon equivalency fees protect against lagging nations stealing market share from U.S. manufacturers.

• To calls for clean-tech R&D and investment: in tandem with the tens of billions in tax credits and other incentives for efficient and renewable energy in the new American Recovery and Reinvestment Act of 2009, the $10 billion annual allocation will support critical research, demonstration and deployment of energy efficiency and renewables.

• To those in impacted industries and regions: the $41 billion in grants will likewise help workers and communities make the transition to low-carbon and zero-carbon industries.

The Larson bill isn’t perfect; for one thing, the energy-price protections from the payroll tax-shift will need to be extended to non-working families and individuals. But the automatic upward adjustment in the carbon tax rate, if required to meet certified emission goals, is a big step forward, and should help allay concerns of cap-and-trade adherents over any quantity-uncertainty with a carbon tax.

Equally impressive is the Larson bill’s carbon tax level; with an increment rate of either $10 or $15 a ton per year — implying annual increases of at least 10 cents per gallon of gasoline and ¾ of a cent per kWh for electricity on a national-average basis — producers, consumers and intermediaries will be moved inexorably to lower-carbon investments and choices.

What may make the robust carbon tax level politically feasible, in turn, is that only a small and declining fraction of the revenue is earmarked for new programs. As noted, by the tenth year, 98% of incoming revenue (96% of cumulative) will be recycled to workers and their families. This should be attractive to growth advocates, deficit hawks and advocates for working families.

Prospective losers: profligate emitters, oil barons and sheiks, mountaintop miners, and ideologues who regard as anathema governmental action to correct “the greatest market failure the world has seen.” And, oh yes, cynics who said the U.S. could never enact a meaningful carbon tax.

Photo: Flickr / himesforcongress.

NY Governor Pulls Rug out from RGGI (NY Times)

Congress Squashes Offsets for Capitol Power Plant (AP)

Obama’s Backing Raises Hopes for Climate Pact (NY Times)

DOE Secretary: White House Open to Carbon Tax (NY Times)

A Carbon Tax for Palin’s Alaska? (ABC Alaska News)

E.U. Appeals to U.S. to Join Common Carbon Trading Market (NY Times)

For too long the conventional wisdom has been that while carbon taxes may be superior to cap-and-trade schemes, there is no way that politicians would ever support a new tax, even one that was revenue-neutral. Environmentalists who might otherwise be supporting a carbon tax because it could produce real reductions in greenhouse gas emissions far more rapidly than cap-and-trade have dismissed carbon tax advocacy as naive and have rallied behind cap-and-trade.

Just as conventional wisdom was consistently proven wrong in the 2008 presidential election, it’s also proving wrong about the political infeasibility of a carbon tax. Just look at events over the past two days.

On Saturday, the lead editorial in the New York Times, The Gas Tax, made a compelling case that the president-elect and Congress should impose a “gas tax or similar levy to keep gas prices up after the economy recovers from recession.”

On Sunday, two prominent Republicans, Congressman Bob Inglis of South Carolina and supply-side economist Arthur Laffer, unequivocally endorsed a U.S. carbon tax in a New York Times op-ed, An Emissions Plan Conservatives Could Warm To, that concisely summarized the politics of climate change and the rationale for a carbon tax from a conservative perspective:

Conservatives don’t support tax increases that are veiled as “cap and trade” schemes for pollution permits. But offer us a tax swap, and we could become the new administration’s best allies on climate change.

The Inglis/Laffer summary of why the Liberman-Warner cap-and-trade bill failed is short and to the point:

A climate-change bill withered in Congress this summer because families don’t need an enormous, and hidden, tax increase. If the bill’s authors had instead proposed a simple carbon tax coupled with an equal, offsetting reduction in income taxes or payroll taxes, a dynamic new energy security policy could have taken root.

Inglis/Laffer cogently present the economic basis for a carbon tax:

We need to impose a tax on the thing we want less of (carbon dioxide) and reduce taxes on the things we want more of (income and jobs). A carbon tax would attach the national security and environmental costs to carbon-based fuels like oil, causing the market to recognize the price of these negative externalities.

They recognize that “the costs of reducing carbon emissions are not trivial” and the concomitant need for revenue-neutrality in carbon pricing:

It is essential, therefore, that any taxes on carbon emissions be accompanied by equal, pro-growth tax cuts. A carbon tax that isn’t accompanied by a reduction in other taxes is a nonstarter. Fiscal conservatives would gladly trade a carbon tax for a reduction in payroll or income taxes, but we can’t go along with an overall tax increase.

Inglis/Laffer directly address concerns that putting a price on carbon (whether through a carbon tax or cap-and-trade) would put Americans at a competitive disadvantage:

If China and India join the United States in attaching a price to carbon, their goods should come into this country without a carbon adjustment. But if they do not, every item they place on our shelves should be subject to the same carbon tax that we would place on our domestically produced goods, again offset by a revenue-neutral tax cut.

If World Trade Organization rules entitle members to an unwarranted exemption from such a carbon tax, then we should change them. Outliers should not be allowed to frustrate the decision-making of the countries that are trying to prevent the security and environmental train wrecks of this century.

Although other conservatives including George W. Bush speechwriter David Frum and the American Enterprise Institute’s Ken Green have made similar arguments, Inglis and Laffer are the two most prominent Republicans to publicly articulate such a clear pro-carbon tax position.

The same day as the Inglis/Laffer op-ed, conservative pundit Charles Krauthammer published his own strong endorsement of a gas tax. Though his Weekly Standard article, The Net-Zero Gas Tax – A Once-in-a-Generation Chance, begins by describing Americans’ “deep and understandable aversion to gasoline taxes,” Krauthammer quickly presents what he refers to as the “blindingly obvious” energy independence and other benefits of an increase in the federal gas tax, and proposes what he calls:

Something radically new. A net-zero gas tax. Not a freestanding gas tax but a swap that couples the tax with an equal payroll tax reduction. A two-part solution that yields the government no net increase in revenue and, more importantly — that is why this proposal is different from others — immediately renders the average gasoline consumer financially whole.

Krauthammer envisions the simultaneous enactment of a carbon tax and an offsetting reduction of payroll taxes, with the payroll tax reduction kicking in a week before the gas tax takes effect. He notes as a “nice detail” the fact that the payroll deduction would be “mildly progressive” and follows with a constructive analysis of some of the nitty-gritty details of implementing his net-zero gas tax.

Finally, Times columnist Thomas Friedman weighed in with yet another strong call for a gasoline and/or carbon tax in Win, Win, Win, Win, Win. Echoing the previous day’s Times editorial, Friedman states what should be obvious:

It makes no sense for Congress to pump $13.4 billion into bailing out Detroit — and demand that the auto companies use this cash to make more fuel-efficient cars — and then do nothing to shape consumer behavior with a gas tax so more Americans will want to buy those cars. As long as gas is cheap, people will go out and buy used S.U.V.’s and Hummers. (emphasis in original)

Friedman follows with a geopolitical argument very similar to that made by Inglis, Laffer and Krauthammer:

A gas tax reduces gasoline demand and keeps dollars in America, dries up funding for terrorists and reduces the clout of Iran and Russia at a time when Obama will be looking for greater leverage against petro-dictatorships. It reduces our current account deficit, which strengthens the dollar. It reduces U.S. carbon emissions driving climate change, which means more global respect for America. And it increases the incentives for U.S. innovation on clean cars and clean-tech.

The weekend explosion of support for carbon and/or gas taxing followed by just three weeks a similar confluence, also described here, in which Thomas Friedman called for a carbon tax, the Wall Street Journal stated its clear preference for a carbon tax over cap-and-trade and Ralph Nader and Toby Heaps made a compelling case for pricing carbon emissions via a tax rather than a trading scheme in a Wall Street Journal op-ed.

This convergence of opinion from Left and Right signals an extraordinary opportunity to obtain bipartisan support for a revenue-neutral carbon tax. As Congressman Inglis and Mr. Laffer conclude:

As president, Barack Obama, by working with conservatives as well as the members of his own party, can at once clean the air, create jobs and improve the national security of the United States — a triple play for the next American century.

Will the environmental community unite to actually help pass climate change legislation? That remains to be seen as environmental groups continue to be split between carbon tax and cap-and-trade camps. I’ve worked closely with some of the groups supporting cap-and-trade, have tremendous respect for them and know they understand how important it is to put a price on carbon and to make very large reductions in greenhouse gas emissions as soon as possible. I know that some cap-and-trade supporters are genuinely convinced that a carbon tax is simply not possible politically. Will that change as bipartisan support grows for a revenue-neutral carbon tax? 

It’s time to recognize that 2008’s conventional wisdom is wrong. If we join together in a bipartisan alliance, Congress can adopt and implement a carbon tax in 2009.

Photo: Valerio Schiavoni / Flickr.

Today’s lead editorial in the New York Times, The Gas Tax, increases already growing momentum to put a price on carbon by making a compelling case that the president-elect and Congress should impose a “gas tax or similar levy to keep gas prices up after the economy recovers from recession.”  The Times warns that the multi-billion dollar aid package for the Detroit auto manufacturers doesn’t address the danger that there will be little interest in buying the fuel-efficient cars the American auto industry is expected to build if gasoline prices remain low, noting that sales of SUVs, pick-up, vans and similar vehicles increased when gas prices declined between 1981 and 2005 and decreased substantially as gas prices peaked earlier this year.   The bad news, correctly noted by the Times, is that sales of gas-guzzlers are increasing now as gasoline prices have plummeted.

The editorial describes two ways to tax gas: a variable consumption tax that would create a floor of $4 or $5 in 2008 dollars, an idea we’ve previously supported, and a variable tariff on imported oil that would have the same effect and also “stimulate the development of domestic energy sources.”

The Times concludes:

A bitter recession is not the most opportune time to ratchet up the price of energy. But if the Obama administration is to meet its twin objectives of reducing the nation’s dependence on foreign oil and cutting its emissions of greenhouse gases, it needs to start thinking now about mechanisms to curb the nation’s demand for energy when the economy emerges from recession in the future.

This also would serve as a signal to American automakers and American drivers that the era of cheap gasoline is not going to last.

We do have a few serious concerns about the Times editorial.  First, an upstream and revenue-neutral carbon tax that comprehensively addresses all fossil-fuel combustion would be far superior to a gas tax, particularly since coal has a higher carbon content per Btu and reduced use of coal for electricity generation and other uses would be a more effective means to reduce greenhouse emissions than a gas tax alone. Second, a tariff on imported oil might stimulate the development of domestic energy sources as suggested by the Times, but would undercut the objective of reducing greenhouse gas emissions; an upstream tax on all oil, imported and domestic, would reduce greenhouse emissions, reduce dependence on foreign oil AND encourage the purchase of the fuel-efficient cars that might save the American auto industry. Third, unlike the Times we believe this is a most opportune time to ratchet up the price of energy, provided that, as we recommend, a carbon tax or gas tax is revenue-neutral. 

Finally, we’re sorry the Old Gray Lady prefaced its powerful rationale for a gas tax with the weak “it might be time for the president-elect and Congress to think seriously about imposing a gas tax or similar levy to keep gas prices up after the economy recovers from recession.” Emphasis added.  For at least the last two years the Times has powerfully editorialized on the need to put a price on carbon.  For example, in November of 2006 it stated:

Since the dawn of the industrial revolution, the atmosphere has served as a free dumping ground for carbon gases. If people and industries are made to pay heavily for the privilege, they will inevitably be driven to develop cleaner fuels, cars and factories.

Today’s editorial describes specific mechanisms to make people and industries pay heavily for the privilege of dumping carbon gases in the atmosphere. It might be time?  No, it’s been time for a long time to put a price on carbon.