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Are EPA Hammers The Best Tools to Ratchet Down Global Warming Pollution?

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Massachusetts v. EPA (2007), the Supreme Court’s 5-4 decision upholding EPA’s authority to regulate greenhouse gases, is rightly considered a legal milestone in the fight against global warming. But it’s nearly impossible to find an economist, business person, or even an environmental advocate who thinks that EPA regulation of the numerous and diverse activities causing global warming can ever be more productive, fair and cost-effective than policies using price incentives. Even Environmental Protection Administrator Lisa Jackson testified to the House Energy & Commerce Committee that regulation by her agency under the Clean Air Act isn’t the best response to global warming.

Where does EPA regulation of greenhouse gases stand today, after the failure two years ago of carbon cap-and-trade legislation? Recall that in 2009, a huge campaign by environmental groups, along with a well-coordinated effort by the House Democratic leadership, led to House passage of the Waxman-Markey climate bill. That bill would have largely supplanted EPA greenhouse gas regulation with a cap-and-trade-offset system, an indirect way to put a hidden and fluctuating price on CO2 pollution. But in the Senate, John Kerry’s frenzied effort to build a coalition around cap-and-trade with offsets came to naught in 2010. The failure of climate legislation, along with the GOP takeover of the House later that year, leaves climate policy exactly where the Supreme Court left it: at EPA’s doorstep.

The Environmental Protection Agency has issued rules mandating aggressive improvement in efficiency of new autos and trucks, and rules mandating “Best Available Control Technology” for new and expanded coal-fired power plants and other stationary sources. For CO2 emissions, BACT is essentially a combustion efficiency standard. But EPA has yet to propose rules for a far larger category of GHG’s: CO2 emissions from existing stationary sources such as power plants and oil refineries. And indeed, fears of economic dislocation and job loss ― which are always concerns when existing facilities come under stringent regulation ― will make it hard for the agency to clamp down hard on these sources, particularly in today’s heavily politicized climate.

Nevertheless, it’s important to ask what a maximal strategy of EPA GHG regulation might accomplish, and how that approach stacks up against indirect pricing proposals like Waxman-Markey and simpler, more direct carbon pollution taxes such as Reps. Larson and Stark have proposed. Economists Dallas Burtraw, Arthur Fraas and attorney Nathan Richardson of Resources for the Future recently examined EPA’s regulatory options. Looking at a decidedly optimistic scenario, they concluded that EPA regulations would reduce domestic greenhouse gas emissions by 12.9% by 2020 (from a 2005 baseline). That estimate assumes that EPA adopts a flexible approach involving tradeable performance standards, which they concede may be less legally defensible than more prescriptive and costly facility-specific regulatory approaches. Their figure also includes non-CO2 GHG emissions reductions counted in CO2-equivalent terms. By comparison, they estimate that the Waxman-Markey bill would have achieved nearly identical reductions in domestic emissions, 12.7%, in the same eight-year time frame.

What carbon tax level and ramp-up would yield the same 12.9% reduction that Burtraw et al. project for EPA regulations? To see, I ran the Carbon Tax Center model developed by director Charles Komanoff. The model uses historic price elasticities in five sectors to estimate emissions reductions for a given CO2 price trajectory. Thus, the model relies on history to predict future behavior — it assumes we will find ways to use less fossil fuel to the same degree as we’ve responded to price changes in the past; the model also accounts for the increasing difficulty (“diminishing returns”) of reducing emissions.

In the table below, I’ve summarized and ranked in order of effectiveness (which corresponds well with revenue), three legislative and two economists’ carbon tax proposals as well as two carbon tax scenarios that the CTC model indicates would mimic the expected emissions reductions of EPA GHG regulations by 2020:

Proposal Initial Rate ($/T CO2) Increase / yr CO2 Tax Rate in 2020 ($/T CO2) Emission change by 2020 Cumulative Gross Revenue 2012-2020 ($B)
Cantwell-Collins $14 (+/-7) 6% $22.31 – 9.1% 866
Krupnick: Waxman-Markey equiv. $18 8% $33 – 12.3% 1,181
CTC: EPA equiv. (% increase) *
 $21.50 6% $34.27 – 12.9% 1,289
CTC: EPA equiv. (step increase) $10 $3.50 $38 – 12.9% 1,136
AEI / Peterson $26 6% $41.44 – 15.1% 1,532
Stark $10 $10 $90 – 24.0% 2,166
Larson $15 $12.50 $115 – 28.9% 2,694
The Cantwell-Collins “CLEAR Act,” a cap with a “price collar” sets a CO2 price between $7 and $21, rising 6% annually. Krupnick et al. (RFF) used the US DOE’s NEMS model to estimate that an $18T/CO2 carbon tax rising 8%/yr to $33/T CO2 by 2020 would achieve equivalent domestic emissions reductions to Waxman-Markey, very similar to the emissions reductions which Burtraw et al. expect from EPA regulations. (Reassuringly, CTC’s model applied to Krupnick’s price trajectory predicts similar results.) For the third scenario, I chose a 6% annual increment in the CO2 price and used the model to estimate the starting price needed to achieve the same reductions as EPA regulations. For the fourth scenario, I took the opposite tack, specifying a $10 starting price and letting the model determine the annual increment rate that would achieve the same reductions as EPA regulation. The fifth estimate uses the carbon price proposed in Fiscal Solutions: A Balanced Plan for Fiscal Stability and Economic Growth, (Peterson Foundation & American Enterprise Institute, 2011). Finally, I ran the price levels and increments in the carbon tax bills introduced by Rep’s Pete Stark D-CA and John Larson D-CT respectively, to estimate the emissions reductions that their climate bills would achieve by 2020.

The results suggest that, holding other things equal, until 2020 climate advocates should be indifferent between EPA GHG regulations and either (i) a carbon tax starting at $21.50 per ton of carbon dioxide and rising at 6% a year, or (ii) a carbon tax of $10/ton rising by $3.50/yr. But of course, other things aren’t equal: a carbon pollution tax would generate billions in revenue, as shown in the far right column in the table. Indeed, economists Ian Parry and Roberton Williams of RFF estimate that the Krupnick proposal would close 1/3 of the U.S. budget gap by 2030. Moreover, as Burtraw et al. point out, it’s not clear how much further EPA regulation could reduce emissions after 2020. That’s because regulations are essentially static and do little to induce innovation or to reduce fossil fuel demand via conservation.

Burtraw et al. conclude:

EPA action under the Clean Air Act is inferior to new [carbon pricing] legislation from Congress, especially over the long term. Although it is possible to identify some readily available opportunities for emissions reductions and push them via regulation (with market tools to keep costs down), it quickly becomes difficult to identify what steps should be taken next. A carbon price (either cap-and-trade or a carbon tax) created by legislation would allow the market to make these decisions.

The numbers tell a sobering story: EPA regulations might, optimistically, achieve significant near-term reductions, albeit at a higher cost than a CO2 pollution pricing system. But more importantly, those regulations can’t be expected to induce further innovation and reduce demand (for example by encouraging improved efficiency) and EPA has explicitly stated that it is not mandating replacement of high carbon energy sources (coal and oil) with lower or zero carbon sources (gas or renewables).

Where does this leave us? Consider the interesting situation that could arise by year’s end. Congress faces both mandatory “sequestration” of the military and domestic budgets (imposed by the debt ceiling legislation) and expiration of the Bush/Obama tax cuts. The House and Senate may therefore be forced to consider ways to raise revenue, perhaps as early as in the “lame-duck” session after the Nov. 6 elections, when the pending retirement of some members and the passing of the election season might allow political “grand bargains” to be struck.

In that eventuality, it will be important to hammer home the point that a rising carbon pollution tax offers not only the potential to achieve greater and far more sustained emissions reductions than EPA regulations, but also a growing stream of revenue from taxing pollution. That is especially salient now, when every tool available is needed to encourage job growth and productive economic activity including reducing or at least avoiding new taxes on work and investment.

Photo by “thefixer” (Flickr).

* Postscript: In A Balanced Plan to Stabilize Public Debt and Promote Economic Growth (2010), William Galston (Brookings) and Maya MacGuineas (Committee for a Responsible Federal Budget) recommended a carbon pollution tax similar to my third scenario: starting at $23/T CO2, rising 5.8% yearly, with proceeds to reduce payroll taxes and deficits.

Why Isn't The Environmental Community Using the Fiscal And Tax Reform "Window" to Push For A Carbon Tax?

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A carbon tax offers a unique and powerful combination of fiscal, economic-efficiency and environmental benefits, argued Adele Morris, the Brookings Institution’s Policy Director for Climate and Energy Economics, at an Oct. 18 forum convened by the Brookings Institution, the Urban Institute and the Tax Policy Center. Morris acknowledged the political obstacles. One of course is the failure of anti-tax politicians to distinguish beneficial “Pigouvian” taxes on pollution from conventional taxes that burden and discourage productive activity. But another has been “tepid” support for a carbon tax from the environmental community.

We heard that as a challenge: Why has the environmental community (with a few notable exceptions) parked itself on the sidelines of this crucial policy debate?

Adele shared her presentation text, which we reproduce below:

Time to ’86 the Tax Code? Prospects for Tax Reform After 25 Years

AN URBAN INSTITUTE – BROOKINGS INSTITUTION – TAX POLICY CENTER EVENT 10/18/11

The potential role for a carbon tax in a broader tax reform package is timely and economically important. This paper addresses two aspects of the issue: the economics and the politics. It makes good economic sense to embed a carbon tax in a broader tax reform package. If you’re going to “go big” on deficit reduction, it makes sense to include a carbon tax, and likewise if you’re going to do serious climate policy, it makes sense to raise revenue for deficit reduction or to offset other taxes. Despite the strong economic case, the political challenges to a carbon tax are many, and they aren’t just from anti-tax Republicans who don’t believe in the science of climate change. Some of the headwind to a carbon tax derives from tepid enthusiasm from Democrats and the environmental community.

Embedding a Carbon Tax in Broader Tax Reform

First and foremost, the reason to do a carbon tax is to reduce the risks posed by climate change. If you don’t believe the science that indicates that humans are responsible for rising temperatures then naturally there is nothing else compelling beyond this point. But if we stipulate the risks of climate change, then a policy that prices those damages (as best as we can estimate them) into fossil fuels is an economic no-brainer.

Adele Morris, Climate & Energy Policy Director, Brookings Institution

The kind of carbon tax policy I support is the canonical carbon tax recommended by many economists. It would fall on the carbon content of fossil fuels broadly across the economy. It would start modestly, at something like $15 to $25 per ton of CO2, and ramp up at a modest real rate over inflation, something like 4 percent per year. It would allow tax credits for carbon in fuels that are not subsequently emitted, for example because it is sequestered underground or embodied in a product, such as plastics.

While it’s true that tax reform is hard enough without larding it up with a grab bag of other policy priorities, especially something as contentious as climate policy, there are several good economic reasons to combine these two efforts. First, a carbon tax can raise significant revenue. Depending on the tax rate, it can raise more or less revenue, but estimates suggest that a price on carbon about $33 per ton of CO2 in 2020 would raise about $180 billion per year. A tax of about the size I described earlier would start out at revenue of about $100 billion per year, and it would rise from there. However, the revenue profile isn’t as steep as you might think because people respond exactly as you want them to — by emitting less carbon. That means that although the tax rate goes up, the revenue tapers off and eventually falls over the long run as the falling emissions dominate the higher tax rate. So a carbon tax is a medium- to long-run revenue instrument, but as emissions fall to low levels in the very long run the tax eventually raises little revenue, which is exactly what you want if the goal is to stabilize greenhouse gas concentrations in the atmosphere.

A second reason to embed a carbon tax in broader tax reform is that a carbon tax can be regressive. If you don’t make the carbon tax part of a progressive tax reform, then you have to fix the regressivity within the climate policy or not fix it at all. If you address the regressivity within the carbon tax system, you can end up with less efficient climate policy – for example with rebates to households to offset higher energy bills. This blunts the incentive to conserve energy, which means you have to have a higher carbon price to get the same environmental benefits, which is obviously more costly.

Third, a carbon tax used for deficit reduction could possibly avoid some of the protracted rent-seeking we saw over the cap-and-trade bill, where relatively little of the debate over cap-and-trade was over the cap — most of the squabble was over who got the free allowances. Everyone who thought they were about to lose their share of the pie had incentive to block the measure and get another bite at the pie. Maybe if all the carbon tax revenue goes to deficit reduction or to fund the reduction of other taxes, then there’d be less to squabble over and we could make some progress.

Fourth, a carbon tax policy that doesn’t apply the revenue for deficit reduction or to offset other distortionary taxes would be a lot more costly to the economy than one that does. The economic literature is clear on this. If you just give away allowances or carbon tax revenue, you’re not getting the economic benefit of reducing distortions from the existing tax system which in turn makes the climate policy a lot more costly than it could be.

A final reason to embed the carbon tax into other tax reform is that it might make it harder to unwind later. There’s always going to be a constituency to repeal the carbon tax, and it will get louder as the tax and retail energy prices go up. If there’s a countervailing constituency that is the clear beneficiary of the other taxes reduced, then we have a counterweight. That’s what they did in British Columbia, which is a model we should consider.

More on the Politics

AEI’s Kevin Hassett recently observed that one reason we not have discussed climate policy this long without actually putting a price on carbon is that economists haven’t done a good job convincing Republicans that Pigouvian taxes are okay, meaning that taxing something you want less of is good economic policy. I agree with his assessment.

I also think economists haven’t done a good job convincing the environmental community that Pigouvian taxes are good environmental policy. After decades of opposition, the good performance of the Acid Rain program led environmentalists to support the idea of cap-and-trade to control air pollutants. And we saw their strong support of the cap-and-trade legislation as it moved through the House but died in the Senate in 2010. However, even as the environmental community embraced cap-and-trade, which put a specific limit on emissions, they didn’t entirely trust it to do the job. Recall that only one title of the monster bill was cap-and-trade. The environmental community embraced, and still does, a wide variety of ancillary policies, some of which would have been redundant to the cap. These include appliance standards, fuel economy standards, renewable energy mandates and subsidies, and a host of other measures that would have shifted around where emissions reductions occurred and raised costs, but not necessarily decreased emissions below the cap.

So if there was lingering distrust of cap-and-trade, there’s probably even less confidence in a carbon tax to do the job. Very few NGOs supported a carbon tax over cap-and-trade, mostly because they viewed the cap-and-trade as more certain environmentally. Perhaps downward sloping demand is just not that convincing, and now, when we’re in the context of discussing a carbon tax instead of cap-and-trade, the unease over letting go of the ancillary policy apparatus is likely to be higher.

The political reality is that Democrats will likely have to give up something to get a carbon tax. It might include proposed or existing clean air act regulations that could become redundant with a carbon tax, spending on clean energy or green jobs initiatives, or transfers to what Republicans view as sketchy UN bureaucracies for climate finance in developing countries. (I would note that the politics of those ancillary policies aren’t just about concern about the environmental effectiveness of a carbon tax; there are important Democratic constituencies for these clean energy measures, such as renewable energy firms and labor unions.) But be that as it may, I think the way forward, if Democrats are serious about putting a price on carbon, is for leaders to put together a carbon tax proposal and to sell it in part by describing what they would be willing to give up to get it.

It might have to wait until we’ve tried everything else, and it hasn’t worked. We can pursue appliance standards and renewable subsidies and the like. Then when we’re not meeting our environmental goals, we’ll converge on the economic equivalent of concluding the earth revolves around the sun and put a price on carbon.

Carbon Tax: Win/Win for Climate and Fiscal Policy

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It’s not cap vs. tax anymore; it’s what kind of tax? That’s the take-home from a symposium, Fiscal Reform and Climate Protection: Considering a U.S. Carbon Tax, held earlier this week at Resources for the Future and co-sponsored by the Peterson Institute for International Economics.

United States Treasury Department

American Enterprise Institute economist Kevin Hassett opened the day by pointing out that economists hadn’t convinced enough Republican lawmakers of the benefits of replacing taxes on productive activity with a tax on CO2 pollution. Hassett noted that damage from fossil fuels’ conventional pollution is large enough to justify a carbon tax even without considering global warming. But he hewed closer to Republican orthodoxy when he cautioned that it would be “folly” for environmentalists and Democrats to try to “prove their machismo” by “holding out for a $65/ton CO2 tax” to combat global warming. Hassett expressed relief that “corrupt” cap-and-trade “is finally behind us.”

RFF’s Ian Parry highlighted the intriguing potential for a CO2 tax to reduce emissions while increasing economic output — provided the revenue is used to cut distortionary taxes that otherwise drag down economic activity — a phenomenon that economists call a “double dividend.” As articulated in their paper, Moving U.S. Climate Policy Forward: Are Carbon Taxes the Only Good Alternative? Parry and his RFF colleague Roberton Williams advocate using carbon tax revenue to cut taxes on payroll and on savings or to lighten future tax burdens. Parry said he estimates that a $33/ton CO2 tax dedicated entirely to deficit reduction could close 25% of the U.S. budget gap.

Bob Simon, Staff Director of the Senate Energy and Natural Resources Committee (ENR), remarked that once one passes the “fork in the road” between “cap” and “tax,” the road signs look the same. Both policies must address revenue, regional disparities and impacts on energy-intensive trade-exposed industries. Simon suggested that broad multi-sector policies like caps and carbon taxes are more politically fraught than sector-specific policies like the Clean Electricity Standard for utilities that ENR voted up two years ago.

Joe Aldy, former White House special assistant on climate, pointed out that a $20/ton CO2 tax could raise $100 billion a year. Aldy, now teaching economics at Harvard, expressed hope that the advantages of a carbon tax will make it more attractive to deficit cutters than other options such as a value-added tax, a cut in mortgage deductions, or curtailing benefits.

Trevor Hauser, an energy specialist at the Peterson Institute for International Economics, presented new modeling results indicating that regional variations in carbon tax incidence may be as little as 3%. Moreover, the emergence of shale gas as a resource option in coal-dependent states may soften opposition there, he suggested, improving legislative prospects for a carbon tax. Hauser stressed both the climate and fiscal benefits of a carbon tax; he showed a Chamber of Commerce memo rating a carbon tax as the most cost-effective climate policy, but he noted that their position may have changed.

Post Script: On the very next day, the Brookings Institution convened a complementary meeting, Time to ’86 the Tax Code? Prospects for Tax Reform After 25 Years. Brookings’ Director for Climate and Energy Economics Adele Morris urged those concerned about climate to push for inclusion of a carbon tax in fiscal and tax reform. In contrast to a value-added tax, Morris pointed out that carbon taxes offer unique additional advantages – they reduce CO2 emissions at the lowest cost and improve the efficiency of the economy.

Photo: Flickr — afagan

Carbon Tax Offers Super Powers to Super-Committee

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With a $1.5 trillion budget “canyon” to leap across, the new “super-committee” would be wise to summon the special elastic power of a gradually-rising carbon tax.

After prolonged high-wire suspense and partisan brinksmanship, President Obama and Congress agreed in early August to establish the twelve-member “Joint Select Committee on Deficit Reduction” to tackle the budget deficit and the national debt. The “super-committee,” as the JSC was instantly dubbed, comprises six Representatives and six Senators, three chosen by the leadership of each party in each chamber.

The JSC’s mission is to agree on $1.5 trillion in deficit reduction steps to be undertaken over the next decade. These spending cuts or revenue enhancements are to constitute a second installment beyond the $917 billion in cuts agreed to in the bargain to raise the debt ceiling. The JSC is to deliver its recommendations to Congress on Nov. 23, with the House and Senate required to vote the entire package “up or down” a month later. If the JSC cannot agree on deficit reduction steps of the required magnitude, or if Congress fails to adopt them, that will trigger $1.2 trillion of automatic cuts divided equally between domestic and military spending.

To be sure, Washington’s obsession with putting our faltering economy on an austerity diet is deeply troubling to Keynesians, including the Carbon Tax Center. Nevertheless, the fix is in, so let’s examine how a carbon tax could be made part of the debt and deficit solution.

The JSC’s options fall into three categories:

1) More budget cuts, which would contract the economy, compounding unemployment and speeding our descent into another recession,

2) Raising revenue by reforming the tax code, for instance by closing loopholes or reducing tax “expenditures” (i.e., tax exemptions that function as government grants), or

3) Finding new sources of tax revenue.

Given the Herculean dimensions of the super-committee’s task, the JSC may find itself pressing all three buttons. In the revenue category, there’s been some discussion of a “value added tax,” but less about a carbon tax or a Tobin (financial transactions) tax both of which have strong policy advantages.

Last year, William Galston of Brookings and Maya MacGuineas of the Committee for a Responsible Federal Budget included a carbon tax in their report, A Balanced Plan to Stabilize Public Debt and Promote Economic Growth. Also in 2010, Congressional Budget Office founder Alice Rivlin reportedly suggested a carbon tax to both the Simpson-Bowles commission, and the Rivlin-Domenici commission. Unfortunately, her recommendation didn’t make it into either final report, even though well-known economists Gilbert Metcalf and William Nordhaus conveyed the same recommendation to the Simpson-Bowles commission. Now the advent of the JSC with its $1.5 trillion mandate and short deadline has dialed up the pressure to look for revenue sources.

How much would a carbon tax reduce deficits? In May, the deficit-hawkish Peterson Institute hosted a fiscal summit in Washington, at which four out of six leading think tanks, including the conservative American Enterprise Institute, suggested pricing carbon as a way to raise government revenue. AEI recommended a carbon tax starting at $26 per ton and growing by 5.6 % per year after that. According Peterson, the proposal would raise $161 billion per year by 2020, enough to reduce the federal budget deficit by 22% that year. They point out that this is greater than the savings from raising the national retirement age to 70 and would reduce the deficit the same amount as eliminating all foreign aid and federal funding for education.

The Carbon Tax Center’s model shows that a more aggressive carbon tax proposed by Rep. John Larson, rising each year by an average of $12.50 per ton of CO2, would generate about $475 billion of new revenue by the tenth year. This would eliminate around 80% of that year’s CBO-projected deficit while reducing U.S. carbon emissions by 30%. Moreover, the mere expectation of a gradually-rising carbon price will reduce the risks and increase the returns to investors in low- and zero-carbon energy and energy efficiency, as former Federal Reserve economist Alan Blinder pointed out last winter in the Wall Street Journal. In other words, simply enacting a carbon tax – even one with a “grace period” prior to startup – would provide a stimulus to a key technology sector (not to mention one in which the U.S. is falling behind China and Germany).

Aside from the carbon tax rate, what other design criteria need to be weighed for a carbon tax to reduce both deficits and CO2 emissions? Economist Gilbert Metcalf recommends a tax covering not just CO2 but other greenhouse gases: methane, nitrous oxide, fluorinated gases and sulfur hexafluoride. Metcalf, a Tufts University economist now serving the Treasury Department, argues that this more broadly-based tax would achieve much greater emissions reduction, particularly in the early years, by inducing replacement of climate-damaging refrigerants and solvents with more benign substitutes – an easier task than rapidly phasing out fossil fuels.

What about the potentially regressive effects of carbon or GHG taxes on modest-income households? When Chad Stone, chief economist at the Center on Budget and Policy Priorities, analyzed the Waxman-Markey cap-and-trade bill in 2009, he concluded that only 15% of the permit revenues would be needed to compensate households in the bottom 20% of the income range for the price increases induced by carbon pricing. Presumably, this finding holds for a simple carbon tax as well. (The revenue could be distributed in a monthly or even weekly “lump sum” by electronic funds transfer). To build in this protection for the most vulnerable, we should reduce estimates of revenue available for deficit reduction by about 15% to provide funding for low income assistance.

If legislators choose to compensate a larger income range from the effects of a carbon tax, then of course, a greater share of revenue will be needed. But because of the strong upward skew in carbon use over the income range, the revenue needed to compensate lower and even modest income levels is substantially less than their proportion of the population, leaving a large portion available for deficit reduction.

Both the Domenici-Rivlin and the Simpson-Bowles deficit commissions considered a so-called “Value Added Tax.” A VAT is a sales tax applied at every level, which would particularly burden retailers and is likely to be even more regressive than a carbon tax. Europeans routinely refer to the EU’s VAT as a nuisance to business – it must be factored into virtually every business transaction – and punishment of the poor. Moreover, VAT’s have no climate or other social benefits, aside from being a source of revenue. When the energy and climate benefits of a carbon tax are compared to gumming up our economy with a VAT that “sticks” to everything, a carbon tax looks sleek, maybe even sexy.

A carbon tax should also be structured to protect energy-intensive industries in relation to overseas competitors. In their 2009 paper, “Design of a Carbon Tax,” Gilbert Metcalf and David Weisbach articulated a simple structure for harmonizing border tax adjustments that, consistent with the WTO’s prohibition on discriminatory taxes, would apply a carbon-equivalent import duty to energy-intensive commodities such as steel, aluminum, paper, chemicals and cement, along with finished products containing them. If a foreign manufacturer could show that its process is less carbon-intensive than production in the U.S., then its harmonizing carbon tax would be reduced.

Harmonizing taxes would incentivize our trading partners to enact their own carbon taxes – in effect, we would be taxing their carbon-intensive exports for them until they enacted their own carbon taxes. With a rising U.S. carbon price, the incentive for our trading partners to enact carbon taxes would rise as well.

In summary, a rising carbon tax offers the JSC an attractive revenue stream for deficit reduction, obviating the need for more onerous and regressive levies such as Value Added Taxes. Low income households could be protected from disproportionate regressive effects by setting aside 15% of carbon tax revenues. And with WTO-sanctioned border tax adjustments, a carbon tax will not disadvantage U.S. industry and will spur much-needed innovation, investment and job growth in low-carbon energy and efficiency in the U.S. It will also encourage establishment of a global carbon price with commensurate global emissions reductions.

The super-committee will need nothing short of super powers to leap across a $1.5 trillion chasm. A carbon tax can provide the extra “bounce” of a substantial and growing revenue stream along with the clear, predictable price incentives needed for sound climate policy and a healthy and growing clean energy sector.

Photo: Flickr — Chanchanchepon