CBO report examines carbon tax’s possible consequences

Establishing a tax on carbon would raise significant revenue for the federal government, but could have potentially serious general economic impacts, the Congressional Budget Office said in a new report. The key question is whether short-term adverse impacts are preferable to possibly disastrous consequences of not addressing global climate change, it suggested.

“Given the inherent uncertainty of predicting the effects of climate change, and the possibility that it could trigger catastrophic effects, lawmakers might view a carbon tax as a reflection of society’s willingness to pay to reduce the risk of potentially very expensive damage in the future,” the May 22 report said.

It said neither CBO nor the staff of the congressional Joint Committee on Taxation has published an estimate of how much revenue a carbon tax might produce. CBO has estimated how much a cap-and-trade program, which is similar, would raise, it added.

In 2011, CBO said such a program established the next year that set a $20 tax for each ton of carbon dioxide emitted, and increasing by 5.6%/year thereafter, would raise nearly $1.2 trillion during its first decade. Total domestic CO₂ emissions would be reduced 8% during that period, it estimated.

By raising fossil fuel costs, a carbon tax would increase manufacturing costs, resulting in higher prices which would diminish individuals’ purchasing power and reduced their inflation-adjusted wages, the report said.

Uneven impacts

It said a carbon tax’s impacts would not be evenly distributed among US households. Higher prices would consume a greater share of income for low-income households than for higher-income households, because low-income households generally spend a larger percentage of their income on emission-intensive goods, it indicated.

“Similarly, workers and investors in emission-intensive industries, who would see the largest decrease in demand for their products, would be likely to bear relatively large burdens as the economy adjusted to the tax,” the report said.

The tax’s general economic effects would depend on how its revenue was used, CBO said. Options include reducing budget deficits, decreasing marginal tax rates, or offsetting costs it would impose on certain groups, it noted. The first two of these options would reduce the tax’s total economic costs, but the third would not, it added.

The report observed that climate change resulting from higher average temperatures is a long-term problem with global causes and consequences which requires a concentrated effort by countries with the heaviest CO₂ emissions to solve.

It said estimates of carbon emissions’ potential social costs vary widely, with the highest occurring when researchers attach significant weight to long-term outcomes, and incorporate a small probability that climate change damage could increase sharply in the future, causing very large—or even catastrophic—losses.

Responses vary

Congressional responses to the report varied. US Reps. Henry A. Waxman (D-Calif.), the House Energy and Commerce Committee’s ranking minority member, and Bobby Rush (D-Ill.), who holds that position on the committee’s Energy and Power Subcommittee, asked the full committee’s chairman, Rep. Fred Upton (R-Mich.), on May 29 to schedule a hearing on the potential climate impacts of not controlling carbon emissions.

But David Vitter (R-La.), the US Senate Environment and Public Works Committee’s ranking minority member, said on May 23 that CBO’s report warned costs would be substantial and generally ineffective without more countries’ cooperation.

“You always hear proponents talk about regulating or taxing carbon dioxide, but you never hear them address the consequences of how it would increase the cost of energy for those least able to afford it, or the detrimental effects on domestic manufacturing and jobs,” he maintained.

An official from one oil and gas association also responded. A spokeswoman for the American Fuel & Petrochemical Manufacturers told OGJ on May 29 that CBO’s report showed what the group has always said: that carbon taxes “would be a regressive albatross on a recovering economy.

“Innovation in domestic energy production is leading the way by attracting high paying manufacturing jobs back to the United States, and the US should not put those jobs at risk for a policy proposal that will do next to nothing to curb global greenhouse gas emissions,” she continued. “This report is yet more evidence that 58 senators were right when they voted to reject carbon taxes earlier this year.”

Contact Nick Snow at [email protected].