Are we ready for a carbon tax? Al Gore thinks so. He recently blogged that a “tax on carbon is an idea whose time has come.” A carbon tax would impose a price on emissions of carbon dioxide and other greenhouse gases. It would rely on market forces to encourage the development and use of clean energy, unlike the inefficient (or so economists would argue) mechanisms that we currently use for that purpose; i.e., direct cash subsidies, tax credits, and mandated use of energy from renewable sources. For that reason, economists like the idea of a carbon tax. Even those with a conservative bent generally agree that it is the most effective way to reduce carbon emissions, although they may question the need to do so in the first place.
Unfortunately, Congress does not appear to have any takers, or at least anyone who is willing to spend political capital to champion a carbon tax. Republicans do not support it because they reject the idea of climate change, or they do not believe that there is a link between climate change and carbon emissions, or they generally oppose new taxes of any kind; and Democrats have not pushed for it, in part, because they are concerned that it would be regressive.
A recent study prepared by the Congressional Budget Office (CBO) is a reminder of other political hurdles that would have to be overcome in implementing a carbon tax, even if Congress could agree in principal that doing so is a good idea. See Effect a Carbon Tax on the Economy and the Environment (May 2013). The CBO study concludes that a carbon tax could increase federal revenue and encourage reductions in CO2 emissions. It also concludes that the tax would impose a cost on the economy. None of those points are particularly surprising or controversial. The study also reminds us, however, that the specific effect of the tax on the economy would depend on how revenues raised by it are used; in short, who benefits from the revenue.
Congress can choose to spend revenues from a carbon tax in any way it wants. It can use it to reduce the federal budget deficit, to decrease marginal income tax rates, or to compensate those who would be disproportionately affected in a negative way by the tax (e.g., low-income households, workers in emission-intensive industries and parts of the country that have no choice but to rely on emission-intensive forms of energy). There is endless room for debate (i.e., political fighting) on how to spend the revenues.
So even if everyone agrees that a carbon tax is good idea, Congress will have to reach further agreement on this and many other essentially political issues before the tax’s time will truly have come