Budget Talks Renew Carbon Tax Debate

Photo: Stefan Wernli[/caption]

As lawmakers scramble to close the budget gap before January 1, the prospect of instituting a carbon tax has reemerged. It has encountered fierce criticism from organizations like the Institute for Energy Research, a think tank dedicated to free market energy policy, but proponents laud the revenue source as mutually beneficial for the environment and government. The renewed carbon tax debate is also bringing to light other environmentally-oriented programs such as cap-and-trade.

A carbon tax would affect companies that use hydrocarbon fuels that release carbon dioxide when burnt, like gas, coal, petroleum, and natural gas, and thus exempt those using green energy production methods like wind and solar.

An August report from the Massachusetts Institute of Technology found within the next 10-year years total carbon tax revenue could reach about $1.5 trillion. Taxing carbon at $20 per ton and raising it 4% annually would generate an average $150 billion of extra revenue per year for the federal government. Although this figure falls far short of closing the $1 trillion budget deficit, it does provide some headway towards curing Washington’s budgetary headache.

Uses for the carbon tax have been hotly debated. Some suggest it be used to fund entitlement programs like Medicaid in order to combat its regressive effects, which disproportionately impact lower-class Americans. Others contend that it should remain revenue neutral and go towards reducing all income tax rates, spurring economic growth. Still more proponents contend that carbon tax revenues are best utilized by recycling them directly back into subsidies for renewable energy projects.

Progress on a comprehensive carbon tax plan in this year’s national budget remains unlikely. However, states like California are already instituting similar carbon-reducing measures, like cap-and-trade. On Wednesday, a key part of Assembly Bill 32 signed by then Governor Schwarzenegger, will attempt to roll back California’s carbon output to 1990 levels by 2020, a 30 percent reduction.

The California EPA Air Resources Board explains, “The cap-and-trade program includes an enforceable emissions cap that will decline over time.  The State will distribute allowances, which are tradable permits, equal to the emissions allowed under the cap.  Sources under the cap will need to surrender allowances and offsets equal to their emissions at the end of each compliance period.”

Should California’s cap-and-trade model succeed, national momentum for curbing carbon emissions through similar systems could grow. A handful of other states have made steps towards taxing carbon. The Regional Greenhouse Gas Initiative, started in 2008, features nine northeast states who have pledged to reduce greenhouse gas emissions 10 percent by 2018, primarily via cap-and-trade. It remains to be seen if cap-and-trade measures are more effective than a carbon tax, but both avenues address the same concern of slowing the growth of C02 emissions, while generating revenue for state and local governments.