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20 Dollar Per Ton Carbon Tax Could Reduce Deficit By $1.2 Trillion in 10 Years
Climate Progress / News Report
Published: Sunday 30 September 2012
“If Obama gets re-elected in November, there could be an opportunity to pass a carbon tax as part of a deficit reduction plan.”
Over the last year, there’s been increasing talk in Washington political circles — including conservative ones — about how to use a carbon tax as a deficit reduction tool. However, with an election season in full swing and a large number of Congressional Republicans campaigning against climate action, the current likelihood of getting a price on carbon is officially zero.
In theory, if Obama gets re-elected in November, there could be an opportunity to pass a carbon tax as part of a deficit reduction plan. With Bush-era tax cuts set to expire and Republicans talking a big fiscal game, Obama might have some leverage to play hardball with Congress and push for carbon pricing as part of a larger package.
It’s a long shot. But a new report from the Congressional Research Service released today illustrates why it’s such an enticing prospect. According to the CRS analysis, a modest carbon tax of $20 per ton that rises 5.6 percent annually could cut the projected 10-year deficit by 50 percent — from $2.3 trillion down to $1.1 trillion.
The CRS report models two scenarios — one based on current law (the blue bar below) and one based on an alternative scenario (gray bar below) that assumes a much greater increase in the deficit due to extension of tax cuts and the avoidance of automatic spending cuts through the Budget Control Act. While the two scenarios vary widely, they show that a price on carbon starting in 2013 could fill in a sizable chunk of the federal budget gap:
Here’s how CRS explained the two scenarios:
The possible contribution of a carbon tax to deficit reduction would depend on the magnitude and scope of the carbon tax, various market factors and assumptions about the size of the deficit. In August 2012, CBO released updated budget projections for fiscal years 2012 to 2022. Under current law, CBO estimated the 10-year budget deficit at $2.3 trillion, or 1.1% of GDP. However, using an alternative fiscal scenario, CBO’s projected a larger deficit—$10.0 trillion, or 4.9% of GDP.
Enacting the carbon tax options discussed in the previous section could reduce future budget deficits. As illustrated in Figure 4, a $20/mtCO2 price on carbon (increasing by 5.6% annually) would have a considerable impact on budget deficits using CBO’s August 2012 baseline projection.
- The 10-year budget deficit could be reduced from $2.3 trillion to $1.1 trillion, or from 1.1% to 0.5% of GDP.
- Overall, a $20/mtCO2 price on carbon would reduce the 10-year budget deficit by more than 50%.
- Under CBO’s alternative fiscal scenario, the same carbon tax would have a smaller impact on budget deficits.
- The deficit would be reduced from $10.0 trillion to $8.8 trillion, or from 4.9% to 4.4% of GDP.
- Overall, a $20/mtCO2 price on carbon would reduce the 10-year budget deficit by about 12%.
In the first year alone, CRS estimates that a $20 per ton carbon tax could generate $90 billion.
But here’s the catch: As the analysis points out, not all revenues from a carbon tax would go toward deficit reduction. Some revenues might need to be “recycled” back to groups of people that would disproportionately bear the costs of a carbon price; some might be offset by lowering the payroll tax; some might go back to industry to help companies invest in new technologies and make a low-carbon transition; and some might go into government clean energy deployment programs.
There are many possibilities that policymakers and economists need to consider. So simply saying that a carbon tax would reduce the deficit by specific amount doesn’t show the full picture. Still, this report offers a framework showing that a modest price on global warming pollution would be a significant revenue generator — and thus a possible bargaining chip in future conversations on deficit reduction.
The political climate for a carbon tax is not good. But polls show that Americans support such a policy by a fairly wide margin. According to a George Mason University poll from April, 61 percent of Americans say they would be more likely to vote for a candidate who supports a “revenue neutral” tax on fossil fuels that would be used to reduce federal income taxes. That’s not the same as reducing the deficit, but it shows support for using a carbon tax to make changes to fiscal policy.
That same poll showed that 75 of Americans broadly support regulating carbon dioxide as a pollutant.
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ABOUT Stephen Lacey
Stephen Lacey is a reporter/blogger for Climate Progress, where he writes on clean energy policy, technologies, and finance. Before joining CP, he was an editor/producer with RenewableEnergyWorld.com. He received his B.A. in journalism from Franklin Pierce University.
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By Aviva Shen
6 comments on "20 Dollar Per Ton Carbon Tax Could Reduce Deficit By $1.2 Trillion in 10 Years"
October 01, 2012 9:09pm
Burn Hydrogen, no carbon there.
http://www.free-energy-info.com/
October 01, 2012 6:47pm
I agree with the main point in Mr Lewis' summary: Mr Lacey's proposal and discussion is much ado about way too little. We need a REAL carbon tax, one that affects people's behaviors, not a mere few cents per gallon of gas. And never mind the details of whether the tax revenue is deemed best used to reduce deficits or to compensate impacts on the most needy. And it surely is no reason to reduce taxes on the least needy.
Somehow this article has prompted more than the usual proportion of truly idiotic and misguided further comment.
M...artist is somehow disgusted, for inscrutable reasons. Too bad.
Mr Townsend is incensed that the extra cost of a tax will be passed on. Of course, all extra costs are passed on, so that - deliberately - the tax dampens demands for the products that are most affected. But how much will the extra costs be? With gas at $4+ per gallon, and able to fluctuate +/- $1 per gallon within the course of a single year, why be so worked up over a steady extra 16 cents - or even a steady extra $1?
Sceptic38 credits Mr Lacey's article with destroying the Democrats' prospects. If those prospects depended on so flimsy a matter as Lacey not exercising his right to write an op-ed, they would deserve to be destroyed.
September 30, 2012 5:17pm
I have issues with this article, which most closely match Sceptic38. I think the carbon-tax idea has been poorly presented here, in a way (keeping with propagandism) that muddies and undermines. But, I was leaning toward believing this is simply one of Mr. Lacey's least-polished articles. If so, he can redeem himself with a followup.
Revenue Neutral Carbon Tax is an idea endorsed by many, including Reagan's Treasury/State secretary, George Schultz. It is currently done in British Columbia. I think it is a good idea. Here is why I think so:
1) I accept we have a climate problem, as indicated by CO2 levels monitored since 1958, average ocean temperatures, and accelerating loss of polar ice. No dispute on the change; way too practically, best explanation is humanity's explosive launch into a fuel-driven economy, which especially ramped up a little over a hundred years ago.
2) Many of us have concerns about having built an economy that is something of a ponzi scheme based on consumption. I.e., we are addicted to such excessive consumption by virtue of the fact that, if we slow down (as has happened), it severely contracts the economy. We have actually evolved to the point where our fiscal policy is doing a wholesale promotion of 'consumption'; "...here, have some money, go spend it to help us all out of this hole...." Ridiculous.
3) We have also evolved in a way that makes us use cars far too much. That nifty RedBox DVD rental? OK, maybe you pick it up on your trip to the store, but now you have to return it or pay more. So, you make yet another trip (in the car) to drop it off. This is but one, short, example. Reality is, there are many, many examples that, if studied, would reveal how intensively (yet stupidly) we overuse our cars. Even at $4/gallon.
4) Generally speaking, it would be good for reducing CO2 and good for saving fossil fuels for say our grandchildren, if we used a carbon tax as a disincentive to gas consumption. It could also be used to generate federal revenues, which could offset income taxes. Such a program could easily be designed so as to NOT damage the lower income brackets. In fact, this is exactly what they are already doing in British Columbia.
5) At $20/ton, this is a 'whopping' 16-cents per gallon gas tax. Thus, I could consume 660-gallons of gas each year (which happens to be more than my recent year average; I wish it was less), before my carbon tax reaches $100. An average family, putting 20,000 miles on a 25mpg car would consume 800 gallons, at a tax cost of $160/year. In British Columbia, they offset tax collections with credits in the amount of $100/adult and $30/child annually. So, if the proposed $20/ton carbon tax was passed and applied as it is in BC, a single person breaks even at 660 gallons/year; a two-parent/two-kid family would collect $260/year, thus would gain spending money so long as they consume no more than 1,625 gallons/year. A gas-frugal family would reap a substantial tax benefit, while gas-wasteful families would feel pressured to clean up and make fewer extra trips to save $1 by returning their RedBox DVD on time (as they should).
6) Now, how about that corporate jet making all those hops to Palm Springs? The vulture capitalist who used bonus depreciation to buy a $5M jet and stick much of the cost onto the public ... well, he sucks 1oo's and 1,000's of gallons/hour while zipping about. His gas consumption habits are way disproportionate to what works for either the climate or the next generations. He should be discouraged from this behavior, with a carbon tax. But, it should be much higher than $20/ton (16-cents per gallon). I would be happy to see triple that (which, again, could offset to even healthier income tax reductions for the lower 80%).
SUMMARY: so, what I found most offensive about this article is the fact Mr. Lacey never stated the clearest point: he was writing about a gas tax worth only 16-cents per gallon, but he obscured it with the per ton rate; and, he torpedoed the idea with his bizarre suggestion that a carbon tax could be coupled with a new extension of tax breaks for the most elite brackets.
It is sickening that we have run deficits bailing out big profit-making banks while also reducing tax burdens on the most elite and ALSO looking the other way when Romney-types so egregiously twist the tax rules and stash cash in Switzerland. All of that is ugly. Offering ANYTHING in a proposal to extend that pile of ugly is a surefire way to kill that anything, no matter how good an idea it might be. It is killed by association with the UGLY.
So, please, Mr. Lacey, clean up this article. And NationofChange, keep on providing the many other great articles you are posting (this one, regrettably, was not up to your regular standards).
A few links:
George Schultz: http://news.stanford.edu/news/2012/july/george-shultz-energy-071212.html
How the BC carbon tax works: http://www.fin.gov.bc.ca/tbs/tp/climate/A4.htm
A sheet of Myths/Facts about the BC carbon tax:
http://www.fin.gov.bc.ca/tbs/tp/climate/A6.htm
September 30, 2012 3:52pm
Gentlemen: I do not know precisely who this soon to be unemployed (I hope) disinformation distributor is. Lacey brings an amazing amount of PROPAGANDA power to bear here. Nothing brings more credibility than the phrase. "There's been increasing talk in Washington political circles." Any sources at all? I didn't think so. The only piece of evidence one needs is to look at the two "Fox news watcher" comments above/below. Thanks a lot Lacey, for destroying the Democrats 2012 prospects with one very ill-conceived article. If Lacey ever wanted to galvanize the old "Bush-Cheney-Ryan electorate", this is it. This is the best article written for the Right this whole election season. Thanks again Lacey, and when you need a job, Murdoch is always hiring. P.S. Thank you so much for making this fair and balanced article your lead story today!
September 30, 2012 3:15pm
I ONLY READ THE HEADLINE - THAT IS PROBABLY ONE OF THE MOST DISGUSTING AND UNIVERSALLY MASOCHISTIC INDITCMENTS OF ALL TIME. I NOW HOPE THE END IS QUICK, BUT MY BIGGEST FEAR IS THAT WITH ALL THE INDUSTRY AND TECHNOLOGY HUMANS HAVE, THE END TOO WILL BE A BOTCH.
September 30, 2012 1:25pm
The Corporatocracy will gladly pass all these additional cost right on down to consumers who are already struggling to keep the lights turned on, food on the table, and fuel in their cars so they can get to work at their three jobs. Typical Tree Huggers who are more concerned about shoving their causes down the throats of struggling consumers and businesses that are trying to keep this economy from cratering. The one positive aspect of the Ultra Right taking control, the end of these fanatics that are attempting to drive us back to the stone age. Four Billion Years that mother Earth has survived the best the universe could throw at her and these people want us to believe that a puny race of Homo Sapiens that have evolved over the past five million years can bring the planet to the edge of destruction with less than 200 years of very basic industrial development. We won't be the first race to go extinct because we listened to a collection of self Important delusional narcissists fanatics screaming that the sky was falling. They need to be confined for their own protection along with all the other various crazies that come along every year declaring the end of the world. Considering the very real potential of a nuclear conflict in the Middle East conducted by another bunch of escapees from a mental institution, I would think that the end of all life on Earth within an hour of the first detonation is a bit more important than plants releasing too much Carbon Dioxide over the next one hundred and fifty years !