Bombshell: High and rising price for carbon pollution emerges as credible deficit reduction strategy
The Peter G. Peterson Foundation funded six groups from across the political spectrum to put forward plans addressing our nation’s fiscal challenges. All the plans are here. The Center for American Progress (CAP) plan, “Budgeting for Growth and Prosperity” [PDF], brings the deficit below 2 percent of GDP within six years and fully balances by 2030.
The CAP budget does so while boosting clean energy research and deployment funding roughly $10 billion a year — and instituting a high and rising CO2 price. The plan achieves the CO2 reduction targets from the 2009 House climate and clean energy jobs bill (Waxman-Markey): A 42 percent cut (from 2005 levels) by 2030, and a 83 percent cut by 2050.
The CAP plan does not specify whether the carbon price would be instituted as a tax or some sort of trading mechanism. Lower income groups are protected from the impact of higher energy prices through rebates and tax reform. The plan creates a single 15 percent tax bracket for 80 percent of Americans. Some of the additional clean energy funding can also go towards efficiency measures that will help lower people’s bills.
The CAP strategy probably isn’t a big surprise to Climate Progress readers. But what is remarkable is that the American Enterprise Institute (AEI) takes a strikingly similar approach on the revenue side — a high and rising CO2 price! As AEI’s plan, “A Balanced Plan for Fiscal Stability and Economic Growth,” [PDF] explains:
Replace energy subsidies, credits, and regulations with carbon tax
Subsidies for ethanol and other alternative fuels would be abolished (basic research on renewable energy would be funded on the same stringent terms as other basic research). As discussed above, business and household energy tax credits would be abolished. Regulations designed to lower greenhouse gas emissions would be repealed.
Instead, a tax on greenhouse-gas emissions (“carbon tax”) would be imposed. The tax would be similar to Revenue Option 35 in the Congressional Budget Office’s March 2011 Budget Options book, but would be implemented as a tax rather than as a cap‐and‐trade program. The tax would take effect in 2013 and be phased in at a uniform pace over five years, so that the 2017 tax equaled the level prescribed for that year in the CBO option, slightly more than $26 per metric ton of CO2equivalent. As prescribed in the CBO option, the tax would thereafter increase at a 5.6 percent annual rate through 2050.
This is actually higher than the CAP price, which is $22 a ton of CO2 in 2017 [$81/ton of carbon], and which rises a bit slower, but still triples in a quarter century.
For the record, if the country did institute such a high and rising price for greenhouse gases as AEI proposes, I would support phasing out energy subsidies by, say, 2020 — as long as that meant ending all energy subsidies, including those for fossil fuels and nuclear power. Once the market saw that the country was seriously implementing a significant price for greenhouse gases and committed to a steady and predictable rise, private sector investment in low carbon energy would soar at every phase — from R&D to deployment.
The Economic Policy Institute budget blueprint [PDF] takes a similar approach to CAP, using carbon pricing to meet the Waxman-Markey targets with “half of the revenue from proposed carbon pricing earmarked for energy rebates and tax credits for low-and moderate-income populations” to “fully offset the higher cost of energy for the lowest 60 percent of earners.” The Roosevelt Institute Campus Network strategy uses the same escalating carbon tax as AEI in their plan.
The Bipartisan Policy Center does not have a new plan. They used their November plan, which comes close to endorsing a high and rising carbon tax. It uses a Debt Reduction Sales Tax (DRST) otherwise known as a sales tax. The “Task Force considered alternative sources of revenue that could be phased-in to help reduce the DRST … Of the alternatives considered, a tax on carbon dioxide (CO2) emissions from fossil-fuel combustion received the greatest — though not unanimous — support. The specific option that the Task Force examined would have introduced a tax of $23 per ton of CO2 emissions in 2018, increasing at 5.8 percent annually.” Ultimately, they did not endorse a carbon tax in November.
Only the Heritage Foundation plan makes no mention of carbon pricing.
All in all, this strikes me as a big deal. Just a few months ago, the political acceptability of any carbon pricing was viewed as virtually nonexistent, a “third rail” for the foreseeable future. Now you have major policy groups from across the political spectrum seriously entertaining not just any carbon pricing, but a high and rising price sufficient to substantially reduce U.S. emissions and put us on the path needed to meet our obligation as part of an overall global deal aimed at 450 parts per million or stabilization near 3.6 degrees F.
Yes, we are still a long, long way from this translating into actual policy. And yes, it may be that congressional Republicans are so committed to their self-destructive ideology that they will reject any revenue increase, which effectively would kill the possibility of any budget deal. That would be as self-destructive to the economy as their science denial is to the possibility of maintaining a livable climate.
The bottom line: It may well be that the most viable way to deal with the revenue side of our budget problem is by simultaneously dealing with our climate problem.
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