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Carbon Tax Talked Up Once Again

The time may be right to push for a carbon tax, both to reduce emissions and to help stabilize the U.S. economy, according to policy wonks and academics. Whether the Obama administration or Congress, however, are ready to tackle sweeping climate change legislation again after a bill foundered in Congress two years ago is questionable.

President Obama, in his first press conference in eight months, earlier this month was asked if Congress has the "political will" to enact a carbon tax to deal with climate change. The president cited some of his first-term success in dealing with vehicle emissions, but said, "we haven't done enough."

If the United States "can shape an agenda that says we can create jobs, advance growth and make a serious dent in climate change and be an international leader, I think that's something that the American people would support," said President Obama, who added he would have more to say in "the coming months and years about how we can shape an agenda that garners bipartisan support and helps move this agenda forward."

Support for enacting some form of climate change legislation has been gaining steam for months, even though some in Congress believe carbon taxes are going to be tough to enact, at any cost.

Sen. Ron Wyden (D-OR) said it would be difficult for Congress to impose a carbon tax on fossil fuel consumption to raise revenue (see related story). "Whether you are for a carbon tax or against it, you'd have to say this is going to be a big lift politically," he said earlier this month.

However a chorus of academics believes there never has been a better time -- both for the climate and for the U.S. economy.

The American Enterprise Institute earlier this month held an all-day discussion about carbon taxes, where the Brookings Institution unveiled a slate of policy recommendations to make the government more effective, including a carbon tax to raise $1.5 trillion over 10 years. The proposal would impose a $10 fee on each ton of carbon, raising an average of $150 billion a year over a decade. Congress and the president would decide how to use the money.

Brookings' Metropolitan Policy Program (MPP) issued the carbon tax policy brief as part of its report, "Remaking Federalism, Renewing the Economy," which offers recommendations to cut the deficit and jump start the economy. Mark Muro, policy director of the MPP, and co-author Jonathan Rothwell, a senior research associate, explained the reasoning behind enacting a "modest" carbon tax in a paper in which they explained that the tax would reduce emissions, finance "clean" energy technology development, cut other taxes and reduce the deficit.

"Although not a 'cut' of the budget, this measure would, like the other 'cut to invest' measures, improve the nation's balance sheet, help to place the economy on a more sustainable footing, and invest in future growth and innovation," the MPP researchers said.

Massachusetts Institute of Technology (MIT) researchers offered similar reasoning in August, in which they suggested that a carbon tax would boost economic growth and create jobs.

"Simpler and more transparent than 'cap-and-trade' schemes, a carbon tax retains the environmental merits of a trading system but eliminates many of the economic, administrative and political debits, as conservative and liberal scholars have acknowledged," wrote MIT's Sebastian Rausch and John M. Reilly. "Moreover, establishing a carbon tax has another virtue: It would raise hundreds of billions of dollars at a time of fiscal need.

"Consequently, the imposition of such a fee raises the potential of a 'win-win-win' solution that could at once help allow for revenue-neutral tax relief, reduce the debt, and correct some of the distortions in the marketplace that result from the fact that carbon pollution associated with fossil fuel use is not now reflected by the market price," said the MIT researchers.

"So here is something to look at. At a minimum, the potential windfall of significant revenue associated with the introduction of a properly designed price mechanism for discouraging carbon pollution would seem to raise the possibility of a bargain in the next Congress that could provide an efficient, inspired response to the fiscal and climate crises at once."

Raising revenue through a carbon tax, once the Bush-era tax cuts expire, could help in three ways, said the MIT duo: Congress could reduce personal or corporate income tax rates, extend the payroll tax cut, maintain spending on social programs, or a combination of these options; cuts in income taxes would spur the economy and encourage more private spending, which would lead to more employment and investment; and carbon dioxide (CO2) pollution and oil imports would be reduced.

Think tanks aren't the only ones that believe a carbon tax could benefit economic growth. Many executives have reclaimed their support for such a tax, including long-time proponent ExxonMobil Corp.

In addition, last week business leaders that included Royal Dutch Shell plc called for global policies and action to tackle climate change -- including setting a price on carbon emissions in the Carbon Price Communique, part of a series by the Corporate Climate Communiques. "With this document business leaders are reiterating the value of a strong carbon price as a tool that if designed properly, can work along with other complementary policies to deliver carbon emissions reductions proportionate with the scale of the climate challenge."

The taxing regime would require some give and take, according to the Congressional Budget Office (CBO). In a working paper this month, CBO's Terry Dinan said taxing CO2 emissions would reduce the damage from climate change but "would also impose a larger burden, relative to income, on low-income households than on high-income households." The carbon tax "would cause the negative effects of emissions to be priced into products. The resulting revenue would somehow be rebated or used to reduce another tax. The idea seems to be gaining more traction." The CBO evaluated the various ways that the effect of the carbon tax on low-income families might be offset.

Others don't want to hear anything about taxes of any kind. Americans for Tax Reform President Grover Norquist blasted proposed carbon taxes and said they would violate the pledges that many Republicans in Congress took at his group's urging not to raise taxes. In fact, said Norquist, it would take a constitutional amendment to eliminate the federal income tax before he would be inclined to support a carbon tax.

"If someone first passed and implemented a constitutional amendment with two-thirds of the House and Senate and three-fourths of the states concurring to forbid the restoration of the income tax, we might more safely consider passing" a carbon tax, said Norquist. "And then, it would be foolish and [an] economically destructive thing to do."

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