The Promise of Revenue Neutral Carbon Regulation
An ongoing public survey from the Yale Project on Climate Change Communication shows that roughly 70 percent of the American public believes climate change is affecting weather in the U.S. And, 60 percent of respondents report that they would be likely to vote for a candidate who supports cutting income taxes in lieu of a fossil fuels tax.
Such a tax could be “revenue neutral.” For example, a tax on carbon pollution would force hydrocarbon-fired utilities to pay a tax per unit of CO2 emissions. With higher operating costs, the utility would have to raise its prices to maintain profitability. Subsequently, the federal government would be collecting increased tax revenues from the industry. Under the guidelines of neutrality, however, the government would reduce some other federal tax by the same amount as increased revenue generated by the new tax.
The result would be only an alteration of tax codes and revenue sources with no change in the total amount of taxes paid to the government. Overall revenue neutrality does not mean that citizens’ individual tax burdens would be unaffected, though. Consumers using relatively little energy would pay lower taxes. On the other hand, people who drive large cars and live in energy intensive homes would end up with higher taxes. But, tax hikes for those citizens could incentivize less energy-intensive behavior which would further reduce national emissions.
But, any change in tax code is bound to create winners and losers. Poorer citizens typically spend a large portion of their income on energy, and enjoy low marginal tax rates. Thus, lowering their tax rates would have a relatively small effect compared to the effect of spending more of their income on energy bills. However, a simple solution exists; utilize a cap-and-dividend policy under which all revenues collected from carbon emitters are distributed in equal shares to any citizen with a social security number. Such a policy would protect and even benefit the poor citizens most adversely affected by higher energy prices while encouraging conservation and efficiency. A carbon tax also imposes administrative costs in that someone, presumably the EPA or some other government entity, must monitor each utility’s emissions.
Opponents of carbon prices often point to these examples in advocacy of letting the free market work. Free enterprise is certainly capable of innovation and progress. But, these adversaries fail to recognize the current market failure as well as a tax’s ability to entice free market development as carbon producers advance and implement technologies in order to reduce their carbon tax bill. In addition, renewable and cleaner energy sources would become more competitive in the marketplace. But, do the benefits of employing a carbon tax outweigh its potential costs?
A revenue neutral, pigouvian tax on carbon would cost the American population nothing in regards to a gross tax increase while creating no net loss in federal government revenue. And even thoughutility providers would be forced to pay higher operational taxes, those outlays would diminish overtime as more and more carbon-free technology became competitive. Further, the new expenses on carbon emitters are simply a reallocation or internalization of existing costs. While society currently bears the cost of carbon pollution through air pollution and climate change effects, applying the tax would simply force polluters, not society, to pay them.
To overcome the tax’s costs shouldn’t be extraordinary considering not only the obvious gains in clean technology and renewable energy sectors but also the nonmonetary, yet real, benefits of limiting carbon emissions. Decreased atmospheric carbon concentrations would translate into fewer air pollution-related health bills, bountiful crop harvests from fewer and less intense droughts, fewer disaster relief expenditures, and the list goes on. Economically these benefits are enormous, and if realized the U.S. could set an international precedent for climate mitigation and economic growth. Because it is a global phenomenon, combating climate change is an international challenge. America should provide the leadership it has in the past, and move forward.
