Is A Carbon Tax Actually Good for the Economy?

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Ever since Obama made his poorly received (by pundits at least) Punish BP/Energy Independence White House address last week there has been a lot of talk that a carbon tax, especially a cap-and-trade one, could be dead. Many read the fact that the President didn’t mention it in his speech as a sign that he was caving to Republicans on environmental reform and giving up his plan to tax polluters. Marc Ambinder over at the Atlantic says you should think of Cap-and-Trade as the public option of the energy bill.

Should progressives be skeptical about the White House’s strategy to pass comprehensive climate change legislation? That strategy, as sketched out by senior administration officials, is to delay the debate about putting a price on carbon production until both the House and Senate have passed legislation. Timewise, if the Senate passes a bill, it would take until the late fall, after the elections, for House and Senate conferees to be appointed.

If the strategy sounds familiar, that’s because it seems to similar to the White House’s approach to the more contentious aspects of health care reform, including the public option, which came to be seen by many on the left as the sine qua non of progress, and which President Obama never fully supported.

If the goal now is to get a bill that begins to wean the nation off of its addiction to oil, a carbon pricing scheme isn’t needed. If the goal is to try to fix the problem of global warming, it is essential. Of course, a bill that includes carbon pricing, either in the form of a direct Pigouvian tax or an emissions credit trading system (cap-and-trade), would include the positive elements you’d find in a weaker bill.

I don’t know if Obama has actually folded on enacting a carbon tax or if this is just politics. That’s something for the folks at Swampland to debate. If he has, it really is a shame. Much of the debate about the carbon tax has not to do with whether it is good environmental policy, but how much it will hurt the economy. Turns out it won’t. A new study by The Economist finds that a carbon tax would actually boost growth. Here’s why:

The economic theoretical case for some sort of carbon tax is very simple. Pollution is a negative byproduct of the industrial process that neither the polluters or the people buying the product directly pay for. Instead government in the end has to pick up the bill, and that means general taxpayers, like you and me. Taxing companies directly for polluting can remedy the problem. But in practice, many worry that a carbon tax will hurt our already weak economy, and hasten our decades of decline in our manufacturing base. So the question is whether a carbon tax is good environmental policy but bad economic policy?

The answer appears to be just the opposite. At least that is the conclusions of a recent study by The Economist:

With all that in mind, we investigated two different basic scenarios. One applied an economy-wide carbon tax that aimed to raise 1% of GDP in revenue by 2020; the other applied a tax set at a level designed to ensure that Britain meets its commitment to cut emissions by 34%, relative to their 1990 levels, by 2020. In both cases, to keep things simple, we scrapped all the other policies that aim at the same outcome, such as Britain’s membership of Europe’s emissions-trading scheme, subsidies for renewable energy and so on. The results of the first scenario are set out in the print piece, but briefly, electricity prices fall as expensive subsidies for renewable energy are replaced by the carbon tax. That provides an economic boost, the government gets an extra revenue stream, and output is 2.5% higher come 2020 than in the baseline scenario.

The Economist is looking at data from the UK, but we can assume that the results would be the same if they looked at the US economy instead. But the biggest argument for a carbon tax may be this: At a time when the deficit is growing rapidly, more revenue generators are exactly what we need. Some argue that increasing corporate taxes, in this case based on pollution, won’t actually raise our tax take. Companies will just move their production offshore and pollute elsewhere, helping neither the US economy or the environment in general. Or perhaps companies will actually cut their pollution. Either way, tax revenue will be neutral or fall. Not so.

First of all, the biggest polluters are utility companies. They can’t easily move their production overseas. Second, it takes time to switch to greener technologies. So there will be a number of years, where even companies making the choice to lower pollution will have to pay the tax.

At the same time, companies are likely to be investing in greener technologies. That by itself, besides the debt reduction benefit of higher tax revenue, will boost the economy and produce jobs. Companies have a record amount of cash on their balance sheets. So they have the money to spend and probably would.

The problem is when people talk about taxes, they often just talk about taxes. And not all the other things that tax policy affects. This just another reason why we need comprehensive energy reform. Nothing should be off the table, yet.