Democrats say CBO report backs carbon tax, GOP has a different take

The Congressional Budget Office (CBO) on May 22 released an analysis of the policy implications of the enactment of a carbon tax, with Rep. Henry Waxman, D-Calif., saying the report makes a compelling case for inclusion of a carbon tax in any legislation to reduce the deficit or reform the tax code.

“CBO’s report shows that a carbon tax is a win-win policy,” said Waxman. “A properly designed carbon tax can help prevent potentially catastrophic changes to the climate and at the same time reduce the deficit or pay for tax reform.”

“Carbon fee legislation could stop big polluters from unloading the costs of their pollution on the American public, and correct a flawed energy market,” said Sen. Sheldon Whitehouse, D-R.I., who often works with Waxman on greenhouse gas issues. “This report shows that a carbon fee also provides economic benefits to American families while significantly reducing carbon pollution. I hope it will inspire more of our colleagues in Congress to consider carbon fee legislation.”

“In order to effectively reform the tax code and reduce the deficit, we need not only to simplify, but to institute a broad-based fee such as a carbon tax,” said Rep. Earl Blumenauer, D-Ore. “The CBO’s report from today shows that a carbon tax could raise more than a trillion dollars over the next decade in addition to helping us deal with carbon pollution. We must carefully manage how the revenue is spent to ensure that it helps the economy grow and does not disproportionately affect low-income individuals.”

According to CBO, “the ultimate economic effects of a carbon tax would depend on how the revenues from the tax were used.” The CBO report identifies two uses of the revenue that could “substantially offset the total economic costs resulting from the tax.” They are using the revenues to reduce the debt and using the revenues to reduce marginal tax rates. CBO says that some analyses have even concluded that “a tax swap could lead to a net increase in output.”

The CBO report addresses the impact of a carbon tax on low-income households and finds that these impacts could be addressed at modest cost, Waxman noted in a May 22 statement. According to CBO, “offsetting the costs for households in the lowest one-fifth of the income distribution would take roughly 12 percent” of the revenue raised by a carbon tax.

The final section of the CBO report makes a case for near-term action to reduce carbon emissions. CBO’s report states that delaying action to reduce carbon pollution “would increase the expected damage from climate change by increasing the risk of very costly, potentially even catastrophic, outcomes.” The report defines a “catastrophic loss” as “a 25 percent decline in global output.”

Report looks at issue of what point in the energy stream to impose a tax

“Carbon becomes part of the U.S. economy when coal, oil, and natural gas are extracted or imported,” said the CBO report. “It enters the atmosphere, in the form of carbon dioxide, when those fossil fuels are burned. Analysts have tried to determine the point in that process at which it would be most cost-effective to levy a carbon tax. The tax could apply either to the carbon content of each fuel or to the CO2 emissions released when the fuel is burned. (A ton of CO2 contains 0.27 tons of carbon, so a price of $20 per ton on CO2 emissions…would be equivalent to a price of $73 per ton on the carbon content of fossil fuels.)”

In addition to deciding where to apply the tax, the report pointed out that designers of a carbon tax would need to consider what entities or uses of fossil fuels, if any, would be exempt from the tax and whether certain activities would qualify for credits under the tax. In general, the cost to the economy of achieving any given reduction in emissions could be minimized by limiting the number of exempt entities and by allowing tax credits for activities that capture and permanently store emissions before they are released.

Most experts in the U.S. power industry think that CO2 capture and storage systems for power plants won’t be commercially viable until next decade. Observers also point out that the chances of a carbon tax passing the GOP-controlled House are slim to none, while the Democratic-controlled Senate is also problematic with Democrats like Joe Manchin of the coal state of West Virginia ready to side with Republicans on this issue.

Sen. David Vitter, R-La., the top Republican on the Committee on Environment and Public Works (EPW), put a different spin on the CBO report in a May 23 statement. He said the report finds that reductions in emissions in the U.S. would “probably have only a modest effect on the Earth’s climate unless they were part of a coordinated effort with other countries.” Earlier this year, Vitter introduced legislation to prohibit the regulation of CO2 and other greenhouse gas emissions in the U.S., until China, India and Russia implement similar reductions.

“It’s not just energy prices that would skyrocket from a carbon tax: the cost of nearly everything built in America would go up,” Vitter said. “Let’s not lose sight of how big of a dud cap-and-trade was in 2009. A carbon tax is really no different. China, India and Russia, some of the world’s largest carbon emitters, have not shackled their economies with burdensome regulations. 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.”

EPW Committee Chairman Barbara Boxer, D-Calif., and Sen. Bernie Sanders, I-Vt., introduced legislation to enact a carbon tax of $20 per ton. According to the CBO report, low-income households would bear the burden of a carbon tax disproportionately. The report said: “A tax of $20 per ton of emissions would raise the price of gasoline by about 20 cents per gallon.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.