A carbon tax, which taxes carbon dioxide and other greenhouse-gas emissions, is a proven means to raise large sums of much-needed revenue while lowering carbon emissions. It is supported by 67 percent of Americans, embraced by a bipartisan consensus of economists and increasingly supported by the business community. Some critics argue a carbon tax is a political distraction, one that fails to meet the climate challenge and disproportionately hurts the poor. Others say a carbon tax would damage U.S. competitiveness and break Biden’s promise to not raise taxes on households earning less than $400,000 a year. We believe each of these concerns can be addressed.
We have no illusions that a carbon tax is an easy sell in Washington. But it may be the only realistic way that Biden can advance his broader agenda. The opportunity lies in forging a bipartisan coalition of fiscally responsible legislators who know that we need to invest in infrastructure and that a carbon tax will be more successful in curbing emissions than excessive regulation will.
While attempting to address many of our country’s immediate and long-term needs, the administration’s spending proposals, on top of our nation’s already-leveraged balance sheet, push the limits of fiscal policy beyond what has historically been considered prudent. The short-term impact may well be positive. But the longer-term challenge is daunting. This year, U.S. debt is expected to exceed the value of the entire U.S. economy for the first time since World War II, posing a serious threat to our long-term future. A 2017 study by the Treasury Department estimates a carbon tax that starts at $49 per ton of emissions, rising at 2 percent annually, could raise $2.2 trillion over a 10-year period.
Would a carbon tax be regressive? Not necessarily. For one thing, the wealthy use a lot more carbon-based energy than those with lower incomes. More importantly, carbon tax revenue could be invested in poorer communities that face disproportionate risks from climate change; targeted to support and retrain workers who are adversely affected by the transition to a clean-energy economy; used to increase the earned income tax credit or other wage subsidies; or redistributed through dividend checks or tax rebates on a monthly basis. Or they could be distributed directly into individual retirement accounts. Such strategies would be highly progressive.
Of course, a primary reason for a carbon tax is to discourage firms from spewing carbon into the atmosphere and encourage them to develop, invest in and scale clean, low-carbon technologies. The Climate Leadership Council estimates a $40 per ton carbon tax, increasing by 5 percent per year above the rate of inflation, would reduce U.S. emissions to 50 percent below 2005 levels by 2035. A carbon tax also offers an incentive to other nations to drive down emissions. That’s because a necessary feature of any sensible carbon tax plan is what’s known as a border adjustment, which would impose economic penalties on certain goods from countries that do not reduce their emissions. In effect, this would protect American competitiveness and alleviate one of the biggest problems in global climate governance — that some countries free-ride on the emission cuts of others. This would move us beyond the model of the Paris agreement, which is based on voluntary emission targets that, while necessary, are wholly inadequate for averting the worst outcomes of climate change.
Putting a price on carbon would advance America’s leadership role in the world. Today, 46 countries and 35 subnational or regional entities, including markets in California and New England, are on the road to instituting carbon pricing mechanisms. The upshot is a mishmash of voluntary and mandatory markets with incompatible standards that price carbon imperfectly and inadequately. It is essential that we standardize the trade in carbon at home and reach agreements internationally to ensure the adequate functioning of this new market. Make no mistake: Carbon credits and debits are on a path to becoming the currency of climate change. The dollar is the world’s reserve currency because investors have confidence in the United States and its economy. The White House should be setting the standards to price carbon, creating the climate-change reserve currency. We can partner with the Europeans, and we certainly shouldn’t cede this responsibility to the Chinese.
The carbon tax is not a cure-all, of course. A mixture of other policies, from regulation and subsidies to R&D investment and targeted incentives, will be necessary to meet the climate challenge. More revenue, including user fees — tolls, vehicle miles taxes, congestion pricing — as well as a responsible increase in corporate taxes and an increase in the highest income tax rate will be needed to meet our fiscal and infrastructure needs. But without a price on carbon, the combined effect of these policies will be insufficient. We believe that, by embracing a carbon tax, President Biden could help restore America’s infrastructure, fiscal strength and leadership at a time when all are sorely needed.