New (Republican) Support for a Carbon Tax

The Issue:

Last year was the warmest since 1880 when recordkeeping began. There is widespread scientific support for the role that greenhouse gases play in the trend rise in temperatures. Yet efforts to combat climate change through policy have been contentious. With the 2009 failure of the Waxman-Markey cap and trade bill in the Senate, it was clear that Congress would not support any policy to put a price on carbon whether in the form of cap and trade or a carbon tax. Consequently, President Obama moved forward with an alternative set of regulatory initiatives including more stringent fuel economy standards for cars and trucks, regulations to reduce carbon pollution from the electric power sector, as well as a variety of other initiatives to reduce methane emissions and other greenhouse gas emissions. The future of those regulations is uncertain under a Trump Administration that has vowed to roll back a wide array of federal regulations in a number of areas.

Senior Republican officials have proposed a simple fix that cuts through the Gordian knot of government policy: a carbon tax with revenues rebated as carbon dividends to all Americans on an equal per capita basis.

The Facts:

• It is widely acknowledged that climate change is driven by increasing accumulations of greenhouse gases in the atmosphere. In 2016 global concentrations of carbon dioxide topped 400 parts per million (ppm), nearly a 50 percent increase over pre-industrial age level; 2016 was also the third year in a row that global temperatures set a record. The average temperature in the United States is trending up with a more pronounced rise since around 1970 (see chart).
• Three-quarters of U.S. greenhouse gas emissions are energy related carbon dioxide emissions. Electricity generation is responsible for 30 percent of overall emissions while the transportation sector accounts for another 25 percent. Industrial emissions are another 12 percent and residential and commercial emissions account for just over 8 percent.
• Current U.S. policy to limit greenhouse gas emissions is a mix of regulation, clean energy tax breaks, and other financial incentives. But their full implementation and continuity are uncertain. The Environmental Protection Agency's (EPA) Clean Power Plan, an ambitious regulation under the Clean Air Act, would limit emissions from the electric power sector. However, its implementation has been stayed by the Supreme Court while legal challenges work their way through the U.S. federal courts. Meanwhile, the Trump Administration has vowed to roll back the rules despite a Supreme Court ruling that the EPA was obligated under federal law to regulate carbon dioxide emissions.
• The Climate Leadership Council's plan would allow the elimination of EPA's Clean Power Plan regulatory approach along with various other government interventions to reduce emissions altogether. It would do so through a gradually increasing carbon tax that starts at $40 a ton of carbon dioxide with revenues rebated through quarterly "carbon dividend" checks paid to all Americans on an equal basis. The authors of the plan estimate that a family of four would receive approximately $2,000 in dividend payments the first year.
• How would such a tax work? A carbon tax raises the price paid for fossil fuels based on their carbon content. Assuming the tax is fully passed forward to consumers, a $40 a ton carbon tax would raise the price of natural gas by $2.12 per thousand cubic feet (a 66 percent increase based on current prices) and the price of gasoline by $.36 a gallon (15 percent). Hardest hit would be coal, which has the highest carbon content per BTU of energy of all fossil fuels. Its price would increase on average, across the various grades of coal, by $84 a ton (264 percent).
• These price increases would lead to an array of responses that would reduce our demand for energy. Consumers might switch to electric cars or drive a little less. Electricity providers would have incentives to produce less electricity from coal and more from natural gas, or other sources such as wind and solar. Energy intensive industries would have an incentive to innovate to reduce emissions. For instance, when the price of oil jumped up to $100 a barrel, airlines retrofitted their airplanes with "winglets," an upswept tip at the end of each wing that makes the wings more aerodynamic and cuts fuel consumption between 2 and 5 percent.
• Economists agree that a carbon tax could reduce U.S. emissions faster and at lower cost to the economy than the existing mix of initiatives. A 2016 U.S. Department of the Treasury analysis projects overall emission reductions of 21 percent by 2028 from an economy-wide carbon tax starting at $49 a ton in 2019.
• There would be winners and losers from the imposition of a carbon tax. Businesses that are not energy intensive would see their costs rise less than more energy intensive firms. There would also be concentrated losses. Demand for coal would fall and jobs would be lost in coal mining regions. The Midwest, which depends more on electricity generated from coal, would see larger increases in electricity prices than would states in New England, which use much less coal for electricity generation.
• The Climate Leadership Council's plan to rebate carbon tax revenue through an equal carbon dividend is highly progressive, proportionately favoring low-income and middle-income households. The 2016 U.S. Treasury analysis estimates the net revenue of a carbon tax starting at $49 a ton in 2019, with the rate rising over time, is over $2.2 trillion over a ten year budget window, even accounting for a possible reduction in tax revenues due to higher energy costs. Based on this analysis, the Climate Leadership Council's carbon dividend approach would benefit roughly two-thirds of Americans who would receive a dividend check that exceeds the higher cost of goods and services due to the carbon tax.
• Carbon dividends are one way to rebate revenues to Americans. Carbon tax revenue could also be used to finance cuts in income and payroll tax rates or pay down the deficit. This approach would promote efficiency gains to the U.S. economy - see the 2013 Congressional Budget Office report detailing a carbon tax's impact on the U.S. economy - but would do less to directly help low and middle income households who would be faced with higher gas prices and electric bills as a result of a carbon tax.
• This approach has been tried and tested. British Columbia implemented a carbon tax in 2008 that gives back all the tax revenue to citizens through dividends and tax breaks, and their economy has not been adversely impacted.