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Put a tax on carbon and cut income taxes

BLOOMINGTON, Ind.

When a group of players as disparate as Al Gore, the International Monetary Fund and President Ronald Reagan's Secretary of State George Shultz all agree on something, it might be worth taking note.

Emphasizing different factors, many policy commentators and analysts, conservatives and liberals alike, are advocating a new slant on taxation — shifting some of the burden to carbon emissions.

For reasons of both environmental protection and reduced government interference in the economy, the United States should adopt a tax on carbon.

While the former reason is perhaps the more important from a global perspective, the latter is the easier to support in today's challenging economic climate. However, as with so many issues, the details of the final policy design are critical.

The public finance argument for a carbon tax starts with an important observation. Taxes interfere with price signals and consequently distort the market, thereby imposing a social cost, referred to by economists as excess burden. A well-designed tax system minimizes the excess burden on society.

A recent study by economists Ian Parry and Roberton Williams points to an opportunity for a win-win change in our tax system. They demonstrate that a tax of $33 per ton of carbon dioxide — about 25 cents on a gallon of gas and less than a couple cents per kilowatt-hour of electricity — could simultaneously reduce U.S. carbon emissions by 8.5 percent and save the economy $4.5 billion per year, even ignoring environmental benefits.

The key to the savings? Congress must reduce income taxes by the same amount as the revenue raised from the carbon tax; it must resist the temptation to earmark the funds for pet projects.

People who claim that carbon taxes are bad for the economy have missed an important point: Income taxes and all of the exceptions built into the system are even worse.

But focusing purely on the financial gains from a better tax system misses an important reality. We need to take seriously the potentially enormous and negative effects of climate change.

Sure, climate science and modeling is complex. Sure, there is uncertainty regarding the specifics. However, as physicist and former climate change skeptic Richard Muller of the Berkeley Earth Surface Temperature Project wrote recently in the New York Times, the best evidence supports the conclusion that climate change is real, global temperatures are rising, and human activity is the cause.

One observer of international negotiations recently told my students that significant climate change skepticism is a condition with which the United States is "uniquely afflicted."

The vast majority of the evidence supports the conclusion that the world faces a real threat from sea level rise, water resource disruption, temperature rise, and loss of biological resources.

Chris Hope of the Judge Business School at Cambridge University has estimated that the benefits of reductions in emissions could justify a carbon tax of nearly $100 per ton of carbon dioxide.

A tax of this magnitude would substantially reduce our emissions. It would work together with the income tax reduction to shift demand away from energy use toward labor and capital investment. It would encourage consumers to shift toward more efficient appliances and vehicles and induce the private sector to invest in developing new technologies and renewable energy sources, thereby increasing national energy security.

Perhaps most important, a significant carbon-tax would signal to our international friends and allies that we are ready to resume our global leadership role in environmental protection.

Even if we can't agree on a tax of $100 per ton of carbon dioxide for the sake of environmental protection, a more modest tax of $30 per ton is just good for economic health.

Far from being a drag on the economy, the change would spur growth and innovation by reducing income taxes that discourage labor and capital investments.

Kenneth Richards is a professor in the School of Public and Environmental Affairs at Indiana University and an affiliated professor of law with its Maurer Law School.

© 2012 McClatchy-Tribune

Put a tax on carbon and cut income taxes 08/19/12 [Last modified: Sunday, August 19, 2012 4:30am]

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