Seeker Blog

The Hassett/Metcalf paper from the American Enterprise Institute is excellent:

…A twenty-first century U.S. energy tax policy would include: 1) an end to energy supply subsidies, 2) a green tax swap, 3) an end to the gas guzzler tax loophole and possible use of “feebates,” and 4) conservation incentive programs. Ending subsidies to fossil fuel production would level the playing field among energy sources and shift us from a policy of promoting fossil fuel supply to encouraging a reduction in fossil fuel consumption. In addition, it would move us away from the reliance on inefficient corn-based ethanol.

We should also implement a green tax swap. A green tax swap is the implementation of environmentally motivated taxes with the revenues used to lower other taxes in a revenue-neutral reform. For example, Congress could reduce reliance on oil and other polluting sources of energy through the implementation of a carbon tax. The revenues could be used to finance corporate tax reform or to finance reductions in the payroll tax.[12] Consider a tax of $15 per metric ton of carbon dioxide. Focusing only on carbon[13] and assuming a short-term reduction in carbon emissions of 10 percent in response to the tax, a $15-per-ton tax rate would collect nearly $80 billion a year, a number that represents 28 percent of all corporate taxes collected in the United States in 2005. Assuming the carbon tax was fully passed forward into consumer prices, it would raise the price of gasoline by 13 cents a gallon, the cost of electricity generated by natural gas by 0.6 cents per kWh, and the cost of electricity generated by coal by 1.4 cents per kWh.

We note that a carbon tax is preferable to a carbon cap-and-trade system, as is currently implemented in Europe. While a carbon charge and a cap-and-trade system could be designed to bring about the same reduction in carbon emissions in a world with no uncertainty over marginal abatement costs, the instruments are not equivalent in a world with uncertainty. Given the uncertainties with respect to the introduction of new technologies to reduce carbon emissions, tax and permit systems can have very different efficiency costs. Because global warming depends on the stock of carbon in the atmosphere rather than on emissions in any one year, the expected efficiency costs of a carbon charge policy are likely to be much lower than the costs of a carbon cap-and-trade system.[14]

Moreover, while a cap-and-trade system could be designed in which the carbon permits are sold rather than given away, experience to date suggests that they will be given away. In that case, governments give up substantial revenue with cap-and-trade systems with which they could lower other distortionary taxes, as discussed in this On the Issues. In a related vein, cap-and-trade systems generate substantial rent-seeking behavior, as firms lobby for grandfathering and generous allowances of permits once a program is put in place. While firms are likely to lobby over the specific carbon charge rate and possibly coverage of the tax, a carbon charge is not conducive to lobbying over allocations, unlike permit systems.