While we debate whether there should be a broad US tax, we already have many implicit taxes on carbon. The real debate is whether there are smarter ways to impose such taxes compared to the cornucopia of existing instruments.

Carbon is taxed implicitly at the federal and state level with the gasoline tax and other fuel taxes. These taxes favor high mileage cars such as hybrids, and are blind to electric vehicles. Because they are based on fuel quantity they fail to represent miles traveled on roads and the proportional damage. So fuel taxes are a blunt instrument to fund highway upkeep. Fuel taxes at the pump would be useless in maintaining roads filled with electric vehicles; fossil fuel cars subsidize those. New CAFÉ standards provide a push towards such electric cars and amplify the maintenance gap. A usage-based road tax divorced from carbon policy may make sense.

Laws at the US and state level create an implicit tax on high carbon fuels through barriers to market entry. Renewable fuel standards may apply to generators or users, to total use, vehicle use, or facility use. These requirements may be implemented through ‘power purchase agreements’ and ‘renewable energy certificates’ that can identify the specific renewable source. Some laws ban the use of ‘high carbon’ fuels. Others favor ‘new’ renewable sources and further push investments from fossil fuels. Such legislative experiments are found in at least 38 states.

Regulations that require utilities to accept renewable energy in their grid systems add to the relative burden on fossil fuels. All but five states now have some form of this ‘net metering.’ Voluntary programs at the state or utility level allow customers to source their energy from specific renewable fuels. Many states now fund research into renewable fuels, further tipping the balance.

Production tax credits and investment tax credits for renewable fuels at federal and state levels and tax credits for renewable fuel use, or for high-mileage or electric vehicles add more implicit taxes on fossil fuels.

Carbon-emitting fuels (particularly coal) now carry an extra cost imposed by government (e.g. EPA regulations). Properly enforced clean air standards add enormous cost to coal facilities and the prospect of continued enforcement; together with carbon intensity limits in new source performance standards make coal unattractive. Prior regulation under the Clean Air Act tended to entrench commitments to established fossil sources.

This growing variety of programs creates an ever-shifting financial picture for base load fuels such as coal and muddies decisions on large infrastructure investments. A unified tax could allow fossil fuel industries to make investment decisions that include the ‘cost of carbon’ and allow investment in new technologies that lead to a low ambient greenhouse gas economy. Negotiations might include leveling the playing field of implicit taxes across states so that corporations can contribute to the solution in a predictable economic environment.

A new carbon tax is unlikely this year, given that both parties have previously rejected the idea. Climate change and greenhouse gas (GHG) emissions will be addressed by legislators at the state and federal level over the coming years. Reforming the tax code, though, is on the agenda now – at least for the House of Representatives – and it offers opportunity for a win-win on energy and the environment.

“Subsidies to fossil fuels continue to distort energy markets and expanded considerably last year,” according to the International Energy Agency’s recent World Energy Outlook 2012. Globally, fossil fuel subsidies totaled $523 billion in 2011, an increase of 30 percent in just one year. This is more astounding when we take into account that OPEC keeps the price of oil artificially high by limiting production. And yet, it is tax credits for renewable energy that hang in the balance into the final month of 2012, with U.S. companies awaiting action by Congress.

The IEA report envisions a U.S. energy renaissance, with rising production of oil, natural gas, and bioenergy. While fossil fuels remain a principal source of energy into the foreseeable future, remarkably the IEA projects that demand for transportation biofuels and biobased products will more than double by 2035. The share of oil, natural gas and coal in the world energy mix falls slightly over the time period, with coal dropping the farthest. Reforming the preferences for fossil energy in the U.S. tax code and renewing credits for energy efficiency and renewables could speed that transition without damage to the eventual goal of energy self-sufficiency.

There are additional policy reforms that can hurry the future. Large-scale investment in energy infrastructure is another policy identified by the IEA report. Many preferences for fossil fuel use also exist within the transportation regulatory structure. A mechanism – whether in the tax code or elsewhere – that encourages automakers and retailers to invest in use and marketing of more GHG-friendly biofuels is a necessary and positive step.

(These comments were jointly written by Jim Kerr, and McGuirewood senior counsel Neal Cabral and Cameron Prell.)

While there are plenty of fiscal drivers supporting a new look at the “tax” aspects of a carbon tax, the political drivers to look anew at the “carbon” part currently seem wanting.

Carbon tax discussions re-emerged over the summer as several conservative think tanks, tax experts and economists began to evaluate options to address long-term deficits. President Obama’s re-election and recent weather events further fueled speculation that a carbon tax may be considered as part of Congressional budget negotiation. However, recent tepid reactions by the Administration and members of Congress have made clear such speculation may be premature. While the academic debate over the merits of a carbon tax has been rekindled in some policymaking circles, no serious debate among elected officials has begun.

The attraction of a carbon tax to many economists has always stemmed from the notion that it is much more efficient to tax carbon emissions (or some other behavior which is undesired) than corporate or personal income, including capital gains. If carbon tax revenue is used to reduce these distortionary taxes on income, many conclude that the resulting tax structure would stimulate investment and increase overall GDP, perhaps even leading to “new” federal revenue. That old theory in support of a carbon tax now finds a new and theoretically attractive political environment as lawmakers struggle to address tax rates following expiration of the Bush tax cuts, short- and long- term budget deficits, and exploding entitlement costs. Thus, economists and tax experts have dusted off a carbon tax as a potential method to bridge some of the gaps between Democrats and Republicans over economic taxes, revenues and budget issues.

However, there is little to suggest that congressional attitudes toward adopting a new carbon policy have changed. There continues to be insufficient appetite on Capitol Hill to tackle climate change, and, unlike new taxes or tax structures, there are fewer political drivers to force Congress to rethink its approach to carbon regulation. Even the Administration seems disinclined to lead a legislative effort on the issue, at least for now.

The Administration is instead moving ahead with efforts to regulate carbon emissions under the Clean Air Act. But doubts remain that an Act rooted in command-and-control structures really provides solid legal authority to mandate deep or even relevant emissions reductions. Thus, carbon regulation under the Act seems unlikely to be sufficiently robust to compel industry to call for a legislative solution to avoid it.

The Administration does face international drivers to address carbon, since participating countries, including the U.S., reached a decision last year in Durban, South Africa to embark upon negotiation for a new international carbon regime (of uncertain form and content) to be completed by 2015. That 2015 deadline may be viewed as a critical domestic policy milestone by an Administration looking to avoid the collapse of international climate efforts, but it is still two years away.

The devastation wrought by Hurricane Sandy, as well as the extended Midwest drought, may begin to act a drivers for action on carbon, although it is too soon to say whether these events will prove sufficient to affect Congressional attitudes.

While economists may see a carbon tax as simple to enact, that will certainly not be the case. A carbon tax raises precisely the same difficult and complicated issues as a cap-and-trade system. Because both approaches put a price on carbon, both will have substantial real world impacts that have to be addressed. What price level would a carbon tax start at? How much would it increase and how fast? Would some revenues be used to further carbon reduction and energy efficiency efforts, how much and how? How will electric power consumers be protected from rate shocks? How will low income consumers be protected from disproportionate impacts to their disposable incomes? How will carbon-intensive industries be protected from competition and job losses? How will offsets (identified as a key cost containment issue) be recognized? The biggest political issues to be resolved will involve geographic inequities, where regions that are more heavily dependent on higher carbon fuels will have to pay more to decarbonize their economies, and also pay higher taxes until those efforts bear fruit. Those regions may also object to a uniform redistribution of carbon tax revenues (e.g., for deficit reduction) where they have paid in far more in carbon taxes than other regions. In the Waxman-Markey debates, many of these issues were addressed by complicated agreements on allowance allocations, and other aspects of the program. In a carbon tax system, they could similarly be addressed though tax credits or rebates, as appropriate, but only after difficult debates, none of which have begun. Thus, although the types of issues in play, and the alternatives available, are similar as between a carbon tax and a carbon cap, that does not make the decisions on these issues any easier.

Accordingly, it is not reasonable to expect lawmakers to simply toss a carbon tax into the middle of already difficult budget and tax negotiations this year.

If we’re going to get serious about reducing the greenhouse gas emissions that are causing climate change, the most efficient and effective policy is to put a price on carbon.

With this year’s extreme heat, drought and wildfires -- and the devastating impacts of Hurricane Sandy still unfolding – there is a growing sense among experts and the American public that we are beginning to pay a price for climate change. Our health and our homes are at stake.

Putting a price on carbon is the best way to avoid much bigger costs in the future. By giving the private sector a clear incentive to invest and innovate, carbon pricing harnesses market forces to reduce emissions at the lowest possible cost.

As a policy instrument, a carbon tax offers many of the same advantages as a cap-and-trade program. But while cap and trade is off the table for now in Washington, a carbon tax may – and I emphasize may – be politically feasible.

Many of the nation’s pressing fiscal challenges – deficit reduction, tax reform, entitlement reform, avoiding deep defense and domestic cuts – could be eased by additional federal revenue. A carbon tax is one potential source. And if used, for instance, to offset payroll or other taxes, it could be revenue-neutral. That might make it acceptable to some of those who signed the “no climate tax” pledge, which specifically opposes a carbon tax resulting in “a net increase in government revenue.”

How any revenue is used would be a matter, ultimately, for the political process. Beyond that, the architects of any carbon tax face a host of design issues: setting a price that is effective and predictable; deciding at what point in the value chain to collect the tax and how to address the regressive impact on low-income families; and addressing how to treat carbon-intensive imports and how to mesh a tax with other federal regulatory authorities.

With even the broad contours of a fiscal deal so unclear, it’s impossible to predict whether a carbon tax might find a place in it. But it’s an idea well worth exploring. After all, taxing things we don't want, like carbon emissions, and cutting taxes on things we want to encourage, like productivity and employment, may be one place where we can find common ground.

Let me qualify that. Washington is not ready for a carbon tax unless Republicans are willing to commit political suicide.

For starters, there is no popular support for carbon taxes. If there were, carbon taxes would have been an issue in this year’s presidential and congressional races. All the noise about carbon taxes came from inside the beltway, not from the hustings.

That President Obama said nary a word about carbon taxes on the campaign trail, despite calling for other ways to “skin the cat” after cap-and-trade died in the 2010 elections, speaks volumes. Even at the recent all-day carbon tax conference hosted by the American Enterprise Institute, Obama Treasury official Gilbert Metcalf repeatedly denied the President “is proposing” a carbon tax or plans to do so.

In the same breath, of course, Metcalf signaled that Obama wants to work with Republicans on a “bipartisan basis” and would get behind a carbon tax if they take the lead. That won’t happen unless they have lost their survival instincts.

Nearly all Republicans in Congress have signed the Taxpayer Protection Pledge, a promise to the citizens of their State or District to oppose any net increase in the tax burden. Although a “revenue neutral” carbon tax is theoretically possible, carbon taxes are suddenly on the table because Washington’s big spenders want to take more of the people’s money. If even one dollar of the proceeds of a carbon tax is used for anything except cutting other taxes, the scheme is a net tax increase. The GOP’s activist base does not easily forgive Republican politicians who break their promises.

Even if the Pledge did not exist, the GOP is currently the anti-tax, pro-energy alternative to a party whose leadership is aggressively pro-tax and anti-energy. Embracing carbon taxes would damage the product differentiation that gives citizens a reason to vote Republican.

Carbon taxes are regressive, placing a larger percentage burden on poor households, which spend a much bigger share of their income on energy (gasoline and utilities) than wealthy households do. If Republicans support a carbon tax in return for corporate tax cuts (a popular idea in some circles), they will be pilloried – this time fairly – for seeking to benefit the rich at the expense of the poor. True, a carbon tax could provide “carbon dividends” to low-income households. But then the tax would create a new class of welfare dependents. Guess which party is better at organizing welfare recipients?

Carbon taxes pose an existential threat to the development of North American coal, oil, and natural gas – one of the few bright spots in the economy today. By design, carbon taxes discourage the consumption of carbon-based energy. The tax ‘works’ by shrinking the economic base on which it is levied. To keep revenues up, carbon tax rates must continually increase as the economy’s carbon intensity decreases. The predictable result is an exodus of carbon-intensive capital, jobs, and emissions (“carbon leakage”). Nobody knows how to power a modern economy with cellulose, wind turbines, and solar panels. Bipartisanship on carbon taxes means co-ownership of U.S. economic decline.

“But even ExxonMobil supports a carbon tax,” some GOP strategist might say. Yes, and Enron supported the Kyoto Protocol. Enron was a major gas distributor; ExxonMobil, a major gas producer. Conventional wisdom assumes a carbon tax would help gas out-compete coal. But Cornell University researchers contend that fugitive methane emissions from hydraulic fracturing make natural gas as carbon intensive as coal. If they are correct, carbon taxes could sabotage the shale gas revolution. Moreover, a successful carbon tax campaign would be a political victory for the same pressure groups who oppose offshore drilling, production of unconventional petroleum from shale and oil sands, and hydraulic fracturing of natural gas.

Republicans held umpteen hearings on Solyndra and the Department of Energy’s (DOE) loan guarantee program. The Solyndra debacle, they said, illustrates the folly of government trying to pick energy market winners and losers. Carbon tax advocates claim their policy differs from DOE’s Stimulus loans. With a carbon tax, government just sends a “price signal” and the market decides who wins and who loses.

In reality, a carbon tax is just a more ambitious version of green industrial policy – an attempt to pick winners and losers across the entire economy. Let’s not forget, central to Solyndra’s business plan was the bet that Congress would enact the price signal known as cap-and-trade. Similarly, DOE Secretary Steven Chu argued that a steadily tightening carbon cap was the “critical step” needed to “drive investment” into companies like Solyndra. For the GOP to oppose “venture socialism” at the retail level only to peddle it wholesale makes little sense. The GOP’s activist base will not fail to notice or denounce such rank inconsistency.

Some GOP economists say we should tax “bads” like carbon dioxide emissions instead of “goods” like labor and capital. Strictly speaking, only finished products and services are “goods.” Labor and capital are inputs, production factors, or costs. Energy is a critical input. Without it, most capital and labor would be idle or not even exist. Carbon dioxide emissions are the inescapable byproduct of the fuels that supply 83% of U.S. energy. Carbon taxes also tax what these economists loosely call “goods.”

During the cap-and-trade debate, some of the same economists said the GOP should advocate a carbon tax because “you can’t beat something we nothing.” They were wrong. We beat cap-and-trade by exposing it as a stealth carbon tax (“cap-and-tax”). They continue to push carbon taxes even after cap-and-trade is dead. Where’s the sense in that?

Some speculate about a grand bargain in which carbon taxes replace carbon regulations such as the EPA’s greenhouse gas emission standards, California’s cap-and-trade program, and State renewable electricity mandates. This is naïve. The EPA, the California Air Resources Board, legislators like Rep. Henry Waxman (D-Calif.), the major environmental groups, and the renewable energy lobbies have been fighting for 40 years for the regulatory programs they administer and influence. They are not going to sacrifice their regulatory sacred cows to get a carbon tax. Their objective is to add carbon taxes to carbon regulation, not substitute one for the other. Talk of a grand bargain is a ploy to get Republicans to the negotiating table.

But shouldn’t Republicans do the “right” thing? Supposedly, Hurricane Sandy demonstrates that carbon dioxide emissions are wrecking the climate system, and things will only get worse unless government puts a price on carbon. But finding a greenhouse “fingerprint” in Sandy is much harder than some pundits assume. Sandy was a Category 1 hurricane before it made landfall. Many stronger tropical cyclones have hit New York for centuries. Hurricanes with bigger storm surges than Sandy’s hit southern New England in the early 1600s – the depth of the Little Ice Age. Sandy was a “super storm” because it was a hybrid – the merging of a tropical cyclone with a winter frontal storm. MIT climatologist Kerry Emanuel says that scientists do not know how climate change affects the formation of hybrid storms, and anyone who claims to know “is not giving you a straight answer.”

Colorado State University hurricane expert Roger Pielke, Jr. points out that even under IPCC assumptions, changes in energy policy “wouldn’t have a discernible impact on future disasters for the better part of a century or more.” Similarly, climatologist Chip Knappenberger calculates, using IPCC assumptions, that “even if the U.S. as a whole stopped emitting all carbon dioxide (CO2) emissions immediately, the ultimate impact on projected global temperature rise would be a reduction, or a ‘savings,’ of approximately 0.08°C by the year 2050 and 0.17°C by the year 2100—amounts that are, for all intents and purposes, negligible.”

Under a carbon tax, the U.S. would keep emitting billions of tons of CO2 annually for a long time – otherwise the tax wouldn’t raise much revenue. So the notion that carbon taxes can measurably reduce extreme weather risk or climate change impacts within any policy-relevant timeframe is ludicrous.

However appealing carbon taxes may be to Democratic leaders, the burn from cap-and-trade is too fresh in their memories to push a carbon tax unless Republicans provide bipartisan cover. Republicans would be foolish to oblige. GOP embrace of carbon taxes would demoralize the party’s activist base, devalue the GOP’s brand as the party that won’t raise taxes or energy prices, undermine the party’s agenda of economic renewal via North American energy production, and make a mockery of GOP opposition to government picking energy market winners and losers. And to what end? As climate protection, carbon taxes are all pain for no gain.

Once the electorate was made to realize that cap and trade bills (Lieberman-Warner, Waxman-Markey, etc.) were actually taxes on fossil energy, cap and trade became political poison. So it is surprising that an explicit tax on fossil energy is now being pushed in Washington.

The hope among carbon-tax proponents is that they can sugar coat the tax and make it palatable to conservatives, or at least to enough conservatives. This proposed confection has two ingredients. First, the carbon tax is to be a revenue-neutral swap for some even more harmful tax. Second, a carbon tax would obviate the need for regulation of carbon dioxide and for subsidies to low-carbon energy.

“Revenue neutral” is supposed to mean that each dollar raised will cut another tax by a dollar. But with neutrality there is no gravy to spread around to all the special interests—and we are talking about $100s of billions in gravy every year. So revenue neutrality will never happen.

We should remember the example of Waxman-Markey, which similarly promised to raise $100s of billions from carbon dioxide. It created a special-interest feeding frenzy that, once the dust settled, would have consumed very nearly 100 percent of the revenue for a decade.

The MIT professors who authored one of the studies purporting to show the benefits of a carbon tax must use a Newspeak version of “revenue neutral,” when they say “All of the carbon tax revenue, after assuring neutrality, is used for tax relief or social programs.” If it were truly a revenue neutral tax, there wouldn’t be any revenue left “after assuring neutrality.”

An anecdote is illustrative of the problem with revenue neutrality. The first person who sat next to me a the American Enterprises Institute’s program on the carbon tax, last week, told me her association’s industry has great plans for the carbon-tax revenue. There appeared to be over 150 people at the event. In all likelihood, many of them represent groups with similarly great plans for the revenue.

Revenue neutrality is out, but what about eliminating overly burdensome regulations? Some proponents of a carbon tax believe the tax properly prices the externalities that vex opponents of fossil fuels and, therefore, eliminates the need for regulation of carbon dioxide. Bolstered by this knowledge of economics, they expect any deal for the tax to include eliminating all or a significant part of these regulations.

That logic may work in PowerPoint-filled rooms at think tanks, but not in the proverbial smoke-filled rooms in Congress. If this logic did carry over, then cap and trade also would have eliminated the need for carbon regulation. Instead of reducing regulations, the cap and trade bills added them. For instance, the Waxman-Markey bill went on for nearly 700 pages before it even got to cap and trade.

Just in case there might be some confusion as to whether the left is willing to trade off regulation for a carbon tax, Representative Waxman recently cleared things up: “A carbon tax or a price on carbon would be a strong incentive for the development of new technologies. But because it’s so complicated, I would not support preempting EPA. EPA can assure us that we can actually get the reductions we need.”

So, the carbon tax must be for things we don’t need.

One thing for sure, manufacturing companies that compete globally are NOT ready for a carbon tax. And, policy makers who are supportive of building a thriving manufacturing sector must insist that a carbon tax and the higher energy costs that come with it - are off the table. A carbon tax would substantially increase the price of natural gas, electricity and transportation fuels.

A lot is at stake. Since 2000, we have lost some 5,000,000 jobs and shutdown about 54,000 manufacturing facilities. For perspective, in 2010 and 2011 we increased about 500,000 jobs – so you can appreciate how far we need to go to re-build the manufacturing sector. Because of our failure to compete, the trade deficit in 2011 finished at $445 billion. Policy makers need to understand that a carbon tax is inconsistent with the potential for a manufacturing renaissance.

Only now, because of low natural gas costs are we beginning to see billions in capital investment announcements that could usher in a tremendous period of economic growth, jobs and exports. A carbon tax would directly increase energy costs, reduce competitiveness and raise great uncertainties toward this new investment.

A $15 per ton carbon tax would increase manufacturing costs by about $17 billion per year and a $50 per ton carbon tax by about $56 billion per year. These are significant increases in costs.

Carbon-intensive, trade-exposed industries will especially face a disproportionate impact within a unilateral carbon tax system. These industries include the chemical, plastics, fertilizer, steel, aluminum, paper, cement and glass. These industries provide the raw materials for essentially everything else that we produce in the US raising the cost of all goods and services. A carbon tax is a regressive policy that should not be considered.

Opponents of affordable energy are nothing if not opportunistic, so in the wake of Hurricane Sandy and the looming fiscal cliff, what better time to push for a carbon tax? Proponents view a carbon tax as a revenue generator that would put a significant dent in the national deficit all while doing what a sumptuary tax does best, to restrict decidedly non-politically correct behavior, or in this case the use of fossil fuel energy. However, what affordable energy opponents fail to realize is that energy consumption can’t simply be quit nor can it be reduced without considerable costs to consumers and especially to the nation’s most vulnerable populations. In its working paper on offsetting a carbon tax’s costs on low-income households, the Congressional Budget Office (CBO) reported that low-income and elderly households would be disproportionately impacted by a carbon tax unless the costs were recycled back either through a reduction in income tax rates, rebates or program supplements. None are good options.

A reduction in income tax rates won’t help 70 percent of households in the lowest income distribution or 36 percent in the second-lowest quintile. Income tax or payroll tax rebates are equally problematic since it would be of no value to those who don’t pay those specific taxes. Similarly, a payroll tax rebate would fail to reach 46 percent of households in the lowest income bracket. The CBO cautioned, “Not everyone – especially members of low-income households and retirees – pay payroll taxes or files an income tax return. But people would need to file a return to participate in a rebate program based on the income tax system.”

Households could of course file an income tax return just to receive the rebate, but we know from experience that millions won’t. For example, in 2008 as part of the Economic Stimulus Act, the Joint Committee on Taxation estimated a payout of $106.7 billion in stimulus funds, but only $94.1 billion was distributed. A lot of money was left on the table and the same will hold true should Congress pass a carbon tax. Defenders of a carbon tax expect the very same body that managed the country right into a record deficit to now manage what could be the largest federal rebate program ever enacted.

At a time when greenhouse gas emissions in the U.S. are at a 20-year low, China and developing nations continue to emit gases in amounts that make any specific domestic action, including a carbon tax, irrelevant. China itself has reported that that it will emit nearly 50 percent more greenhouse gases than the U.S. by 2015. Even the Environmental Protection Agency (EPA) understands the limitations. Testifying about projected global carbon dioxide levels, EPA Administrator Lisa Jackson told a Senate Committee that, “… U.S. action alone will not impact world CO2 levels.” A carbon tax can’t change the simple law of nature that air circulates among continents. Significant reductions in greenhouse gases are achievable only through a global response.

The administration has set a goal of a 14 percent reduction in carbon dioxide emissions in the transportation sector by 2020, but at what cost to consumers? A Harvard study found that to meet the EPA’s goal, gasoline prices would surely rise with Americans spending as much as $7 per gallon. An analysis of the only carbon tax bill introduced to date shows that the legislation would add an additional 25 cents per gallon in 2015 and then escalate to $5.20 per gallon in 2024. That $5.20, by the way, is on top of the regular price of gas so Americans would be looking to spend over $10 per gallon by 2024. That is okay with Energy Secretary Steven Chu who is on record as saying, “Somehow we have to figure how to boost the price of gasoline to the levels in Europe.” For the sake of the country let us hope that Chu decides not to stick around for Obama’s second term in office.

While opponents of affordable energy continue to push for larger subsidies and more mandates for renewable fuels, history has proven such policies to bear significant costs to consumers with little to no benefit. An analysis by the Congressional Research Services, for example, found that renewables were the recipient of 77 percent of energy tax subsidies yet were responsible for just 11 percent of actual energy production. Despite such government support, existing renewables are still incapable of meeting the country’s energy demands and would fail due to their lack of affordability and ineffectiveness in a truly competitive market. Given that the U.S. deficit now tops 16 trillion, the level of federal subsidies to renewables is not sustainable. How much longer should taxpayers be expected to wait before Congress and federal regulators acknowledge the insurmountable limitations of trying to tax and mandate our way to a more diverse energy mix?

A carbon tax from an energy policy perspective makes no sense because its impact on reducing greenhouse emissions is unclear. It is equally questionable whether a carbon tax would realistically affect the federal deficit. Raising money isn’t the issue, but do we really believe that Congress will overcome the temptation to divert revenue generated from a carbon tax to a range of existing federal programs, not to mention new initiatives? Don’t bet on it.

Standalone climate legislation seems exceedingly unlikely. The parties cannot come to agreement on whether Congress should act to limit carbon, let alone what solutions are most appropriate. Recent buzz over a carbon tax highlights what could be the outlines of a narrow agreement: using a revenue-neutral carbon price to buy down tax rates and spur economic growth. But despite the economics and the timing lining up, the politics remain daunting.

To limit carbon output, there’s much to commend a carbon tax. At its simplest, it would be a mechanism that forces the market to recognize the social cost of greenhouse gas emissions and enables efficient decision making about how to reduce behavior that creates emissions. Pricing the global warming externality would render unnecessary existing government subsidies and regulatory programs that push alternative energy and energy efficiency. The market, seeing a profit opportunity, would innovate low-carbon solutions that can’t currently compete with the low cost of incumbent fossil fuels.

Naturally, a carbon tax could generate a large pot of money. Dedicating that revenue to reducing other inefficient forms of taxation could not only diminish the contractionary nature of a new tax, but actually help expand the economy. Shifting taxation to something we want less of – carbon emissions – lets us reduce or eliminate distortionary taxes in our economy that drag down incentives to work, save, and invest. Art Laffer has made this argument many times – often with his neighbor Al Gore – as have Greg Mankiw and Irwin Stelzer.

The EPA is churning out a series of expensive, heavy-handed regulations to suppress carbon emissions from vehicles, electric facilities, and resource development. Without Congressional action on climate change, the EPA will continue to use the Clean Air Act as a blunt tool to force carbon out of our economy.

This year, the U.S. corporate income tax became the highest in the developed world, and we continue to struggle with a persistently sluggish economy. Comprehensive corporate tax reform is long overdue. Broadening the tax base and eliminating cumbersome credits and preferences in the code go a long way, but new revenue may be necessary to bring the U.S. closer to a competitive international rate.

Seeing an opportunity, the private sector appears ready to consider trading one form of taxation for another. Last week, ExxonMobil publicly endorsed a revenue-neutral carbon tax, and AEI cohosted an event with IMF, RFF, and the Brookings Institution to analyze the economics of carbon taxes. Questions over whether such a policy would violate Grover Norquist’s tax pledge forced him into the dialogue, too.

The economics and the timing seem to favor a reasonable discussion over the carbon tax, but is agreement politically feasible?

Though the left has claimed the mantle of action on climate change, they seem dedicated to subsidizing favored industries and technology solutions, rather than simply reducing carbon emissions. (A common point of opposition to a carbon tax is that it would provide incentives for the use of clean natural gas above renewable power solutions.) On the right, there is a stern opposition to accepting climate change as a meaningful policy issue and a deep mistrust in creating a new mode of taxation; despite the conservative economics of carbon pricing, few conservative politicians buy in.

But for these purposes, let’s assume it is politically possible. There are still major issues to tackle. Would a price on carbon be possible without total preemption of EPA authority to regulate the output of carbon dioxide? Could we construct an appropriate border adjustment that requires foreign trade partners to compete on the same terms? What kinds of protections for low income individuals will be necessary or possible?

The U.S. can’t solve the problem of climate change on its own, and we certainly shouldn’t try. But erecting an appropriate market signal for the economic damage wrought by climate change can help our market adapt, innovate, and, in the right circumstances, grow. Indeed, if political will dictates action on climate change, a carbon tax is a much more elegant and efficient solution than the clumsy regulatory approach the administration is pursuing now.

A decision whether to assess a carbon tax should be driven primarily by environmental and economic efficiency reasons rather than purely fiscal ones. The reality, though, as Washington scrambles to find new sources of spending cuts and tax revenues to avoid the fiscal cliff, is that politics are driving the timing and tenor of the carbon tax debate. The appeal of a carbon tax should be bipartisan, as Chairs of the Council of Economic Advisors under Presidents Clinton and George W. Bush favor it for a variety of reasons.

Those in favor of a carbon tax have argued that carbon taxes can raise badly needed revenue, which can be used to reduce (or avoid increases in) other forms of taxation on labor and capital that can hinder economic growth. These non-greenhouse gas (GHG) reasons in favor of a carbon tax, however, mostly serve as a hedge in an environment of political uncertainty. The primary reason for taxing carbon is, and should be, to reduce GHGs and the resulting climate threats. While enticing in its currency, we should resist the temptation to point to the damage from Hurricane Sandy as all the evidence we need. We have much more than that – evidence that is cumulative, systematic, long-term and predictive. Numerous national academies of science reports (in the U.S. and other countries) and other accumulated evidence suggests there are plenty of scientific and economic reasons alone to justify the attention to GHG effects on climate and policy fixes such as a carbon tax.

A price on carbon, whether through a tax or through a cap-and-trade program, is the single most effective element in a comprehensive approach for bringing down GHG emissions. An enduring price signal can drive continuous low-GHG investment in ways that other policies, such as technology mandates and subsidies, cannot do on their own.

The key to a carbon price is its laser focus on the problem. The more GHGs you emit, the more you pay, and the more you save by reducing them. Therefore, there is always an incentive for continuous improvement to reduce emissions. In contrast, a regulation mandating certain low-carbon technologies tends to freeze innovation if compliance is simply a matter of installing what regulators determine to be the best available technology. If a lower-emitting technology comes along, there is no real incentive under a technology mandate to install the new technology once the compliant one is in place unless the new process happens to be cheaper, too. However, with a price-based technology, firms may adopt the newer technology if the cost savings from reduced emissions justify the accelerated replacement cost.

There has been much ink spilled on the relative merits of a carbon tax versus a cap-and-trade approach to creating a carbon price. I will not recap the arguments here other than to say their commonalities trump their differences. The two approaches have more in common with each other and, moreover, can be made to look like each other with hybridized adjustments (e.g., adjusting the emissions target in response to price shifts, adjusting the tax in adjustment to emission shifts). This makes the choice between the two mechanisms less important than the choice of one of the two mechanisms over other approaches.

The fiscal benefits of a carbon tax should be viewed in the context of the larger picture. A carbon tax starting out at $10-15 per ton of CO2 equivalent—a carbon price level similar to those estimated to prevail under the Waxman-Markey bill cap-and-trade bill approved by the House in 2009—would raise about $60-80 billion per year starting out and would vary over time based on how much one believes the emissions base would shrink in response to the tax. This amount of money, of course, is not trivial, and is far more than any environmental levy in our history. However, the fiscal cliff itself is an order of magnitude larger than what a carbon tax alone could address. So pro-carbon tax or not, one should not see this as the only solution to the country’s fiscal problem.

If the Obama Administration and Democrat leaders in Congress pursue a carbon tax as part of their deficit and climate policies, they will test the old axiom that if you don’t learn from history, you are condemned to relive it.

In 1993, President Clinton proposed a BTU tax on energy in his first budget. The political backlash was breathtaking and broad. Since energy is embedded in every part of the economy, the BTU tax would have raised the cost of almost all goods and services. Economic consulting firms concluded the tax would do “serious damage to a fragile economic recovery.” At the time, it was estimated that the tax would raise $30 billion and cost each family $500. Today, the costs would be about $50 billion and $800. Job losses were estimated at 700,000 over three years.

The BTU proposal became a catalyst for a broad based coalition representing large and small businesses, transportation, manufacturing, agriculture, building trades, and even social service organizations that need gasoline and heating oil to care for the poor and homeless. The work of the coalition captured a lot of attention from the media. Its grassroots activities made clear to members of Congress that they should support the tax at their own peril. Since, as Samuel Johnson once observed, there is nothing like a hanging to concentrate the mind, Democrat support for the tax vanished. With outright defeat clear, the Administration sued for peace and the BTU became a relic of flawed policy.

BTU became a verb and members of Congress wanted to avoid being BTU-ed, but in 1994 voters enacted retribution and turned Congress over to republicans.

The economy is in worse shape today than it was in 1993, and it could easily slip back into recession. Carbon tax proponents argue that it would be revenue neutral with reductions in other taxes. But that requires suspending disbelief and a triumph of hope over experience.

In theory, the carbon tax proposal is elegant. Tax something considered bad and lower taxes on something considered good, for example labor. There are two problems that are not easily solved.

First, since the Energy Information Administration (EIA) projects fossil energy to remain our primary energy source for decades and energy is deeply embedded in the economy, a carbon tax would raise the cost of all goods and services. The Congressional Budget Office (CBO) recently concluded that it would have a disproportionate impact on lower income families. That would lead to efforts to mitigate this regressive impact. But that fix would not be straight-forward and soon there would be far more complexity than anyone predicted. And complexity breeds unintended consequences.

Second, it is no secret that Congress is addicted to spending. A small carbon tax at the outset would be easy to increase in small increments. Then in time a small tax will become a big tax. Anyone who doubts this should study the VAT experience in Europe. Rates go up; never down. Even today as they face economic catastrophe, Spain and Greece are considering raising their VAT above 20 percent.

Using climate change as a justification demonstrates why this proposal is a sham. Our carbon dioxide emissions are declining and according to the EIA will not return to 2005 levels until 2035. Part of that decline is due to a poor economy but a major part is due to the shift from coal to natural gas, which is still in its early stages of transition. A far wiser policy would be to remove barriers to that transition so it can take place faster.

Carbon emissions are rising in China and other emerging economies. Helping them develop the capacity to use our energy technologies and make greater use of natural gas would slow their emission growth, help them raise their standards of living, and increase our exports which would increase jobs.

We can do better than create the son of a BTU!

If Washington really wanted to discourage greenhouse gas (GHG) emissions, a globally-mirrored, revenue-neutral carbon tax would be the least harmful way to do it. Current U.S. policies with respect to carbon are seriously misguided and are likely to impose substantial real costs on current and future generations of Americans while having little impact on world-wide GHG emissions. However, the relative virtues of a carbon tax are what make it unlikely to be adopted. The special interests who advocate on behalf of a climate policy would have to give up far too much.

Economic theory tells us that if GHG emissions really are harmful, a “Pigovian Tax” would reduce them at far less cost to the public than any portfolio of regulatory mandates and subsidies could ever achieve. Ironically, this is its Achilles’ heel. Only a fraction of the political support for climate policy is driven by the supposed climate benefits; most of the impetus comes from the cost side, from groups who expect to be able to profit at the public expense.

Consider, first, the goal of our international negotiating partners, because no GHG-reducing program will work unless it is global. Other nations, especially those in Europe, for years have been insisting that we negotiate, not a carbon price, but a quantitative cap on U.S. emissions. This translates into a cap on the size of the U.S. economy – with side payments to other nations if the U.S. ever dares to outgrow its assigned cap. These countries will not regard a carbon tax, however effective it might be, as an acceptable U.S. contribution to a global climate regime, because it would not satisfy their goal of limiting the U.S. ability to compete.

Similarly, within the U.S., special interests who aim to profit from climate policies will not see much value in a carbon tax. Agribusiness interests have been making billions from misguided mandates for renewable fuels, and would fight any attempt to replace them with a carbon tax. Wind and solar technologies, if they really work, would benefit from a carbon tax. But to the extent they can’t compete, they will likely have a strong preference for the direct subsidies they enjoy now.

The regulators who have been using climate concerns to seek greater authority to control the economy will see little to like in a simple carbon tax. And the market-mimicking virtues of a carbon tax will not be realized unless Congress is willing to reverse the Supreme Court’s decision to apply the Clean Air Act to GHGs, to repeal DOT’s automobile fuel economy standards and DOE’s appliance efficiency standards, and to clean out the morass of other regulations that purport to control our energy use. Opposition to a tax may be especially strong from state regulators, such as those in California, who have begun to sell GHG allowances and will oppose any policy that would convert those revenues into federal revenues.

The costs of any program aimed at reducing GHG emissions will cause prices of goods and services to rise, but for politicians, the advantage of the current regulation-subsidy patchwork or a cap-and-trade system is that these higher prices are not easily traced to climate policies, or to the politicians responsible for them. A transparent carbon tax, in addition to reducing emissions more cost-effectively than the alternatives, would allow Americans openly to weigh the tradeoffs between higher costs and environmental benefits.

The final nail in the carbon-tax coffin is that with it would come demands for exemptions, rebates, credits, and all manner of loopholes, in addition to a wish list of new spending. If the revenues are used as they should be – to offset other taxes and reduce the deficit – then legislators and the administration will not get to spend them on vocal constituencies and pet projects. What’s the fun in that? Politicians who habitually ask themselves “whose votes am I buying if I support this bill?” will not find a persuasive answer in a clean and simple carbon tax.

I support a carbon tax in that it will put a price on carbon, recognizing that there is a cost associated with the emission of greenhouse gases. With a financial cost associated with the damaging effects of fossil fuels, renewable energy sources will be able to compete on a fair playing field for the first time where they will be comparable in cost, removing an obstacle to adoption. For this reason, I have cosponsored the Save Our Climate Act, H.R. 3242, which would establish such a carbon tax.

The ease or difficulty in getting a carbon tax adopted may well lie in the details of how it is structured. If a mechanism can be found to establish a fixed value for a tax so that everyone can be certain going in what the tax would cost, that might help to assuage those who fear the uncertainty of how large the tax might be and how it might change in the future. But what is the right cost of carbon? At what level should the tax be set? What will the revenue be used for – to help those with less resources meet the higher cost, to develop green technologies, to support adaptation to climate change, or for deficit reduction? These are difficult questions to answer, and the success or failure of any legislative effort will be highly dependent on how it answers them.

The notion of a carbon tax is not without its complications, however. For one thing, simply imposing a tax on carbon provides no guarantee that carbon emissions will not continue to rise – as long as someone is willing to pay the price to emit, there is nothing to stop that behavior. That is one of the benefits of a cap and trade system – it would establish a limit so that we don’t go beyond the tipping point after which our climate will be irrevocably altered. My home state of California’s own cap and trade law is now taking effect, with the first auction for greenhouse gas emissions allowances being held on November 14, 2012. Next year, California’s carbon market is scheduled to be linked to Quebec’s, demonstrating that international collaboration on a system that places a firm cap on carbon emissions is possible and that a broader agreement is achievable.

I don’t think the question should be, is Washington ready for a carbon tax, it should be is the American economy ready for a carbon tax? The answer to that question is a resounding no.

A carbon tax is one of the most regressive and damaging taxes Congress could propose, driving up the cost of energy, manufactured goods, and anything that is transported to market.

The harshest impacts of these price spikes would fall on those least able to cope. CBO recognized as much recently with their working paper discussing how to offset the higher costs on low-income households. The biggest takeaway from CBO’s analysis is that a carbon tax is not a free-standing policy; it must be coupled with massive new redistributions of income to adjust for the blow a carbon tax would deal to certain individuals. Some of these redistributions would be triggered automatically, like the Social Security COLA and SNAP. However, some would need to be legislated, like a beefed-up EITC or LIHEAP.

Even an increased dependency on government wouldn’t fully shield the economy from a carbon tax’s impact. The impact studies from earlier cap-and-trade proposals detail the job losses and reduced growth that carbon taxes would usher in. The ACCF-NAM study showed that the country would see nearly 2 million fewer jobs and approximately $500 billion less GDP growth, by 2030.

President Obama recognizes as much and following his first term’s deviation from economic revival down the health care and financial regulation rabbit holes, he appears hesitant to do it again. At his recent press conference, the President said: “If the message is somehow we’re going to ignore jobs and growth simply to address climate change, I don’t think anybody’s going to go for that. I won’t go for that.” He later added, “We’re still trying to debate whether we can just make sure that middle-class families don’t get a tax hike. Let’s see if we can resolve that. That should be easy.” But of course a carbon tax would be a massive tax hike on all Americans.

The President is right: Rejecting a carbon tax and its impact on the economy “should be easy.”

In this Congress, there’s a zero chance that a carbon tax will be adopted. Conservatives and Tea Party activists who work on energy and environmental issues won’t even discuss a carbon tax without EPA preemption on the table.

And what do we mean by EPA preemption?

We would insist that Congress amend the Clean Air Act so that (1) EPA no longer has the authority to regulate greenhouse gases and (2) EPA could not pursue another regulation that on its own – or in combination with another regulation – would substantially eliminate coal as a fuel source for America.

In our opinion, this preemption would more accurately reflect the intent of the legislators who passed the Clean Air Act in the first place – none of whom believed that coal should be banned via regulation from the nation’s energy mix. Moreover, a decision to eliminate coal – one that no doubt would hold enormous economic and social implications for America – should be made by the Congress, and not by a handful of Washington bureaucrats who have no accountability to the people.

We take this position for one single reason: to ensure that the poor and the working class in America continue to have access to affordable and reliable electricity.

Certainly, our side has learned the hard way that EPA is incredibly effective at killing by a thousand cuts over a lengthy bureaucratic process that can last for years. Even if we were to remove the possibility of EPA greenhouse gas regulation, it’s unlikely that coal would survive the host of other pending EPA rules that directly or indirectly target the fuel, including the Utility MACT, coal ash, and NAAQS requirements.

So if we were to agree on a simple preemption of EPA greenhouse gas regulations in exchange for a carbon tax, the environmentalists would be laughing hysterically on their way home, knowing that other EPA regulations would certainly kill coal over time.

Of course, the environmentalists would reject the scope and form of preemption that we would demand. And why is that?

Our environmentalist friends know that our political system would never agree on a carbon tax that’s steep enough to kill coal on its own. In order for a carbon tax to force power generators away from coal, it would take a tax so incredibly high that it would amount to political suicide for anyone who supported it. In short, unlike the case of EPA regulation, environmentalists could not backdoor a global warming agenda via a carbon tax, which would be relatively transparent to the majority of Americans.

Moreover, even if our side were to agree to support a steep carbon tax, the Republican Party could then campaign on repealing it in a future election – after gaining the EPA preemption. So in the end, the environmentalists could be left with a neutered EPA, no carbon tax, and a healthy coal sector in America. And they know this.

So why are we having this discussion now?

Like so many things in Washington, it takes time for conversations to reflect reality. It’s only a matter of time before the carbon tax discussions grind to a halt. There’s simply no room for compromise.

Nonetheless, the possibility of success for the carbon tax could change in the long run.

If the EPA destroys the use of coal in the United States, begins to restrict fracking, and survives any legal challenge to those attempts, a number of Republicans are likely to support a carbon tax to protect what’s left of a decimated U.S. energy-intensive industry.

A carbon tax, which would likely be WTO consistent, could be used to leverage the imposition of carbon constraints on China and other large developing countries that want to export energy-intensive goods to the United States. Thus, the carbon tax could be viewed in the future as a viable strategy to help level the playing field in global trade and protect U.S. jobs from cheaper imports.

Caught between supporting a carbon tax and accepting the destruction of U.S. manufacturing by the Chinese is a tough place for conservatives and libertarians. For this reason – and only for this reason, the carbon tax could receive substantial support in the long run from Republicans.

Of course, it’s our – the Tea Party’s – job to ensure that this scenario doesn't occur.

OK, I get it. We’re not going to have a carbon tax. The climate wars are still too raw and the recoil from new taxes is still too automatic. So I get it. I read the “No Climate Tax Pledge” press-release signed by the entire House GOP leadership. Washington is not yet ready for a carbon tax—not even after Hurricane Sandy and amid the dire trade-offs of the debt mess.

And yet, let’s see where we are in April when the numbers aren’t adding up on a grand debt reduction bargain and neither closing deductions nor discretionary spending cuts are delivering enough revenue to forestall marginal tax rate hikes.

That’s when things will get interesting and that’s when—perhaps—ideas like mine for a pro-cleantech, pro-tax-cuts carbon fee might begin to look pretty enticing.

To be sure, the current resurgence of climate concern will be part of it if Congress takes another look. In the wake of the disastrous impact of Hurricane Sandy on the New York area many members are again focused on the nation’s still-undefined strategy for mitigating the effects of global climate change. And yet, should Congress move to explore a carbon fee in the coming session it will be motivated mostly by the nation’s massive debt problems. After all, all parties now recognize the urgency of beginning to control the national debt and a bipartisan consensus is emerging that addressing the current fiscal crisis will require significant new revenue as well as spending cuts.

All of which suggests the potential attractiveness of imposing a modest tax on carbon dioxide emissions especially if it is done in the way my group at the Metropolitan Policy Program at Brookings proposes.

What is our proposal? As part of our Remaking Federalism I Renewing the Economy federal reform series, we suggest Congress may find it opportune at some point to enact a modest carbon tax of about $20 a ton, with a significant portion of the revenue yield (perhaps $30 billion a year) reserved for investments in clean energy and energy efficiency-related RD&D and deployment and the remainder dedicated to pro-growth tax reductions (and rebates to affected low-income households) or deficit reduction.

Why do we structure our proposal in such a way? First, the fairly low and slowly rising fee, starting at $20 a ton and rising by 4 percent a year in real terms, reflects outstanding modeling done by the MIT Joint Program on the Science and Policy of Global Change on the optimal economic structure of the fee as well as taxpayers’ relatively low tolerance for high fees. Yet even so the modest fee would generate a lot of money—some $1.5 trillion over the next 10 years, according to MIT.

Second, our heavy emphasis on RD&D reflects the need to complement pricing strategies with direct investments in technology “push” measures to ensure that decarbonization proceeds rapidly and adequately. More and more the literature is underscoring the inadequacy of politically achievable price programs to by themselves induce sufficient decarbonization and technology change. Pricing must be accompanied by direct technology “push.”

Finally, we would have Congress apply the rest of the revenue (approximately $120 billion a year) to tax cuts, rebates, and-or deficit reduction as a way to build support for the program, protect low-income households from gas and electricity price increases, and stimulate growth. And it is here where a carbon tax opens up room for a variety of what the MIT modelers call “win-win-win” solutions.

Congress and the president could, for example, recycle some or all of the remaining revenue to permit revenue-neutral reductions of personal or corporate income taxes, payroll taxes, or taxes on capital. In the MIT and Brookings models this group of options actually improves overall economic performance beyond what it would be without the carbon tax. Likewise, Congress and the president may wish to use some of the carbon tax’s revenue to protect low-income households from the consumer impacts of the carbon price. Or, alternatively, Congress and the president could dedicate portions of the tax revenue to deficit reduction, which will lower taxes and stimulate growth in the future.

In sum, the $150 billion annual yield of a $20 per ton carbon tax—which exceeds the likely yield of most of the realistic options now on the table for budget stabilization—holds out an extremely attractive “win-win-win” opportunity as the MIT team calls its to address the nation’s fiscal and carbon problems even while spurring the economy.

Such a feature—if embedded in a federal budget deal—would bring new options to an extremely difficult fiscal moment. A carbon tax could, if entertained, provide a fruitful site for enacting some combination of investments in technology development, income or payroll tax cuts to stimulate growth, and-or meaningful deficit reduction. And it would help the nation respond to the climate changes that are increasingly linked to extreme weather events like the hurricane that devastated New Jersey and the greater New York region.

So, for now I will just say: Congress and the president should explore this particular tax on consumption that could also accelerate technology change, spur new growth, and contribute to fiscal stabilization. It’ll be waiting for them when they are ready.