With the policy summary of the IPCC WGII report out, this is a good time to concentrate on policy. Any effort to lower emissions has to put a price on carbon and other greenhouse sources. As I think extensive discussion has shown, a carbon tax is the best way to price emissions, and to price the destruction of carbon sinks.

One advantage of carbon taxes (and auctioned permits as well — close enough to a carbon tax for practical purposes) not often noted is that it they produce revenue that can be directed back to consumers. This is an important contrast to the Kyoto system, where large numbers of permits were given away to big polluters. As with any method of raising the price of carbon, ultimately the cost was passed on to consumers. But with the permit giveaways, the consumer did not recover any of those costs.

On a small scale, this is merely painful and unfair. But suppose this was done with a large-scale rise in emission prices — one that increased the prices of consumer goods by 25 or 50 percent? Not only would this cause direct suffering, the odds are pretty good that reduced consumer demand would cause at least a recession, with a real risk of world-wide depression. You need to return some the costs to consumers, not only on moral grounds but on Keynesian ones — to avoid a precipitous drop in overall demand.

I will add that when you talk about a drop in consumption for poor people, you are talking not just suffering but death. Even in the rich nations, there people poor enough that cutting their real income by a third or half will kill some of them. Cut the income of people in poor nations already living on a few dollars a day, and you are talking slaughter.

Gifting the money to the rich (as permit giveaways or income tax cuts do) does not solve this. The rich cannot, by themselves, keep consumption from falling. And for you supply-siders, additional capital made available from such cuts or giveaways would not provide stimulus to make up for what would be a demand-led downturn. So a carbon tax or auctioned permit system lets you avoid serious economic consequences a permit giveaway would provoke — providing the money is directed in a way to benefit large numbers of people.

Most people proposing a carbon tax understand this. That is why you have proposals to use the money to reduce payroll taxes, or to fund school programs, or fund a clean energy program; use the revenue in ways that probably benefit large numbers of people; the result is not only more fair (benefiting people who otherwise would be hurt) but provides the stimulus to avoid a downturn.

However, I still see a political problem with such programs: they tend to benefit narrower groups than are hurt by them — either demographically or over time. Payroll tax cuts do nothing for retired people (many of whom are either poor or on the edge of poverty and would be deeply hurt by utility and other price increases), nor the non-working disabled. Additional funding for schools provides no immediate benefits to families without someone attending those schools — the old again, as well as single people. Remember these taxes distribute pain to just about everybody, so distributing benefits to a smaller number is political suicide.

In addition, in the long run, revenue from these taxes will decline. Their whole point is to discourage consumption. Of course they will be phased in gradually via escalator clauses; so even as emissions decline, revenues will rise for a while. But past a certain point, that will change. The tax will be fully phased in, and revenue will decline. It is not a good idea for things like social security or school funding to depend on declining revenue sources. When the time comes to replace those revenues, I guarantee conservatives will use the opportunity to push for funding cuts instead.

What about using carbon tax revenues for a clean energy fund? It answers one objection: such a fund would ultimately benefit everybody. But it replaces it with a question of timing. Efficiency improvements and clean energy sources can be put in place quickly, but not at the same rate as a carbon tax is put into place. So the benefits would trickle in much more slowly than the costs. Most people would see higher energy bills long before efficiency means lowered them again.

As an example, think of climate control improvements in existing buildings — perhaps the single thing that could be implemented most quickly. Imagine a package: attic and floor insulation, weather sealing, window insulation kits, insulated curtains or shutters. Now here is the problem: there are only so many people skilled at doing energy audits and installing this kind of package. You can train some, but recently trained workers without experience are not who you want installing insulation in your home. Training would need to be done at a slow enough rate that trainees could be absorbed into experienced teams and gain experience themselves before new trainees were added. Even a crash program for every home the U.S. (minus those with climate control efficiency measures already in place) would realistically take between four and ten years (at minimum) if you wanted quality work.

So the only way to use the revenue from a carbon tax or auctioned permit system would be to return that revenue directly to the residents of the region that levied it. Everyone who bore the costs of a carbon tax would benefit from it, in about the same time frame. Because higher income people tend to cause more greenhouse emissions than poor ones, such a refund system would be slightly progressive net — providing most people with more income than the carbon tax increased their costs. Once in place it would be popular; everyone likes getting checks; see also Alaska.

A long term advantage to this is less resistance to incremental raises. Higher carbon taxes would mean larger checks. So you could build both scheduled increases and automatic ratchets that respond to emissions declining less than scheduled.

Yes, we would still need a clean energy fund. But we could fund it from something other than a carbon tax. Everyone who has looked seriously at what it would take to solve global weirding has realized it will take more than putting a price on carbon. George Monbiot, Joe Romm, the Stern report, the CERES group, and RMI are examples. Note that this transcends ideology. Monbiot is somewhat left, Stern and the CERES group are conservative. I’d describe both Joe Romm, and the RMI as centrists. My next post on this subject will deal with what policy will be needed beyond a carbon tax.