Delayed Action on Cap and Trade Comes at a Cost

In spite of mounting evidence that greenhouse gas emissions will continue to increase the earth’s temperatures, political polarization in Washington is standing in the way of the United States doing its part to address this global crisis.

A new report from the United Nations’ Intergovernmental Panel on Climate Change paints a sobering picture of the need for the governments to take immediate action to reduce carbon emissions. The report finds that despite ongoing efforts by developed nations to curb these emissions, greenhouse gas emissions “have grown at about twice the rate in the recent decade (2000–2010) than any other decade since 1970.” The report also outlines compelling arguments for enacting policy solutions (such as a carbon tax or a “cap and trade” mechanism) to curb emissions in the very near term, because delays could make it impossible to prevent substantial increases in worldwide temperatures and would likely increase the cost of any mitigation efforts.

But as the New York Times notes in its coverage of the report, these findings are falling on deaf ears in Congress. The Times spends far more ink detailing the political impossibility of a carbon tax than it does discussing the report’s bleak findings. The politics surrounding the carbon tax are, indeed, challenging. Congressional efforts to reform the tax code are widely perceived to have ground to a halt in this election year, and any effort to hike carbon taxes would face additional opposition from lawmakers.

This opposition is, in part, sensible: in general, a national tax on consumption is a bad idea that would make our already unfair tax system even more so. Taxes on consumption are regressive, taking a much larger percentage of income from middle- and low-income families than from the rich. This is because middle- and low-income families must spend most or all of their income on basic necessities, while rich families can put a lot of their income toward savings (which are not touched by a consumption tax).

A tax on carbon emissions, while inherently regressive, could be coupled with features to keep it from burdening middle-income Americans and hitting low-income Americans the hardest. Because any such tax would likely generate substantial new revenues—the Congressional Budget Office (CBO) has found that a carbon tax that starts off at $20 per ton and then rises by 5.6 percent annually could raise as much as $1.2 trillion over ten years—it would be straightforward to design a tax cut, such as a reduction in the federal payroll tax or a targeted tax credit, that would help to offset the impact of the carbon tax on middle- and low-income families. Since our tax system already imposes substantial taxes on low-income families who would be hit hardest by a carbon tax, a low-income offset must be part of any acceptable environmental tax reform.

And there are other compelling arguments in favor of some form of carbon tax. It would create a market incentive to develop low- or zero-carbon emission energy sources and simultaneously create a market disincentive to using carbon emitting energy sources. In other words, while it would raise substantial new revenues, it would reduce the amount of greenhouse gasses released into the atmosphere, as manufacturers, shippers, and consumers shift away from fossil fuels.

Of course, discussions of environmental tax reform should not distract lawmakers from the fundamental challenges facing our existing tax code. As we have argued, both the individual and corporate income taxes are ridden with loopholes that should be repealed as part of revenue-raising federal tax reform. And we’ll shed no tears if Congress starts its 2015 session by requiring General Electric and other big multinationals to pay their fair share of the corporate tax rather than dealing with the thorny carbon tax issue. But the latest UN report is a stark reminder that the potential costs of delay on environmental tax reform will be substantial.