Late last week, the French Constitutional Council blocked Sarkozy’s proposed carbon tax. The reason given was that the levy gave too many exemptions to industry and unfairly taxed the cost of motor fuels and household heating. Proponents of a carbon tax should look carefully at this recent result in France – especially at the widespread exemptions earned by major emitters – before claiming that carbon taxes are obviously superior to cap-and-trade. Getting a real carbon tax that is more effective than a real cap-and-trade is not as easy as proponents would have you believe. Too often, the comparison is made between a theoretical carbon tax and a cap-and-trade proposal that has been through the political sausage maker.
All that being said, it might well be that the US is nearing a crossroads when it comes to climate policy. On the one hand, it appears less and less likely that 60 votes can be had for a cap-and-trade bill in the US Senate (for this, see the comment in the above article regarding Sarkozy’s inability to enact domestic law to live up to his international promises. On the other hand, the need to address the jobs situation is becoming a front-burner issue.
Could a carbon tax including a double-dividend be part of the solution to something that Congress actually cares about?
Just imagine a $25 per ton carbon tax. Computed General Equilibrium (CGE) models of the US economy estimate that this is roughly what would be required to get to Obama’s promised 17% cut in US emissions. AEI estimates that using the revenue to reduce payroll taxes would allow a cut of 15% in the payroll tax (FICA) while also being distributionally neutral. They claim that the supply of labor is inelastic so that this wouldn’t necessarily lead to higher employment. But this ignores the fact that the FICA is paid jointly by employers and employees. Presumably, giving half of the FICA cut to employers would lower the marginal cost of adding additional labor to production processes, and lead to higher net levels of employment in the US at no net cost to the Treasury. That’s something that deficit hawks, politicians concerned about unemployment in their district (isn’t that all politicians right now?), and environmentalists could get excited about.
Added bonus – you can explain it to your constituents in 30 seconds or less – try doing that with cap-and-trade.