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Can Our Current Economy Support a Carbon Tax?

There has been some political buzz lately on how a carbon tax would affect the U.S. economy. Some of this is due to the recent introduction of climate legislation by Senators Bernie Sanders (I-VT) and Barbara Boxer (D-CA), chairman of the Senate Committee on Environment, on February 14th. Provisions of this two-part bill, the Climate Protection Act and Sustainable Energy Act, include pricing carbon, protecting families from fracking, and investing in sustainable energy, among other things.

A carbon tax is a tax levied on the emission of carbon dioxide (CO2), which comes from the combustion of fossil fuels. A suggested tax of $25 per ton of CO2 would raise approximately $125 billion each year.

Revenues from a carbon tax can be used in a variety of ways. They can go toward reducing the federal deficit, funding the development of more sustainable energies, or funding other tax breaks.

The overall goal of a carbon tax is to see carbon emissions decrease. As a result of this tax, there will be increased incentive in the energy industry to produce cleaner energy and emphasize more innovation in sustainable energy. However, the introduction of a carbon tax is a highly controversial topic.

Depending on how the tax is designed and implemented, it could disproportionately burden lower income households. Energy prices are likely to increase. Prices of energy intensive commodities like steel will also go up, which could harm U.S. competitiveness in the international market. The National Association of Manufacturers recently released a study conducted by NERA Economic Consulting stating that a tax on carbon would do all of these things.

All of these issues and potential solutions were discussed at an event hosted by Resources for the Future and the International Monetary Fund titled “Comprehensive Tax Reform and Climate Policy.” The event included a panel of distinguished experts in the fields of economics, public policy, and environmental change. There was a general consensus that there is a feasible way to implement a carbon tax without adversely harming the economy, and that the U.S. needs to be a leader in climate policy to begin a global initiative. There are currently only ten countries that have implemented a carbon tax – most recently Australia in 2012. More on what was covered by the panelists, solutions to potential issues, and additional statistics can be found here.

While it is generally agreed upon that there is a need for climate change policy, there is not enough pressure on Congress to do anything about it. Lawmakers are especially wary of enacting any new taxes, even if they are used to subsidize other tax breaks or fund investment in new projects. Panelists at the RFF and IMF event also agree that until more pressure is put on Congress for climate change and tax reform, it is unlikely legislation will be passed soon to implement a carbon tax.

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