Carbon Tax: How to Deal with a Sagging Economy, Tax Reform, and Climate Change in One Fell Swoop

How a carbon tax could solve more problems than just climate changeIt can seem counter-intuitive, but passage and enactment of a carbon tax would have far-reaching positive effects on the US economy and society, stimulating investment, innovation and economic growth, and making US business and industry more competitive. So asserts 35-year energy and aerospace industry veteran Jim Hartung, now the president of energy information services provider

Several organizations have proposed variants of a US carbon tax, all of which incorporate mechanisms that both shield lower income individuals from its regressive nature while also building in incentives to reward those who lower their fossil fuel consumption and hence emissions while penalizing those who increase theirs.

Opponents have pounced on the counter-intuitiveness of carbon tax proposals, asserting they would further stifle economic recovery and growth by raising energy costs, disproportionately affecting lower income Americans. Exactly the opposite would be true, Hartung argues in his Sept. 13 op-ed on Energy Pulse.

Carbon Tax: Keystone for building a better America, and world

Hartung explains the three principles upon which his carbon tax proposal is based:

  1. It should include both a tax and tax credit. Entities that extract carbon from the ground, import carbon, or emit other greenhouse gases are taxed. Entities that remove carbon from the atmosphere or prevent it from ever entering the atmosphere receive a tax credit.
  2. The level of the tax and tax credit should reflect the external costs of fossil fuels, such as the indirect costs of oil imports, air pollution, and global warming.
  3. The tax and credit should begin at a reasonable starting level and increase slowly to their full level over several years, so energy consumers have time to adjust to the true cost of energy.

To illustrate how the carbon tax would work and the benefits it would yield, Hartung puts forward the example of a carbon tax and tax credits of $20 per ton of carbon dioxide (CO2) and equivalent greenhouse gases, increasing to $100 per ton in 2025 and thereafter, with annual adjustments for inflation that if enacted in fiscal 2013 would come into effect in 2015.

How a Carbon Tax Would Work

An initial carbon tax of $20 per ton would add 20 cents to the cost of a gallon in 2015, which is actually much less than the volatility in prices at the pumps Americans have been experiencing, he notes. Amounting to an additional $1 per gallon of gasoline, the $100 per ton in 2025 carbon tax would incorporate the true external costs of fossil fuel production and consumption into carbon fuel prices, costs that have never been incorporated in energy prices before, he explains.

Analyzing the benefits his proposed carbon tax would produce, Hartung writes, “There are many obvious and a few not-so-obvious benefits of this carbon tax. Because it localizes responsibility to those entities that produce and use fossil fuels, it elicits more responsible actions from both energy producers and energy consumers.”

Each substantial in their own right, the benefits of such a carbon tax encompass:

  • Energy efficiency improvements 10%-20% above Energy Information Administration (EIA) projections over the next twenty years by “replacement of inefficient technologies and development of new high-efficiency technologies…Since the US now spends more than $1 trillion annually for energy, each 10% increase in efficiency saves more than $100 billion in annual energy costs.”
  • Enhanced energy security as a result of further declines in US oil imports by making enhanced oil recovery—that includes CO2 sequestration in depleted oil fields. The Dept. of Energy (DOE) estimates as much as 137 billion barrels of additional oil could be produced in this manner in the US, Hartung notes.
  • Enhancing US competitiveness, by making the US an energy exporter. No longer in need of Canadian crude oil, both “the US and Canada could be exporting energy and energy products worth $100 billion to $200 billion annually in 10 years.”
  • Adding to US’ comparative advantage in energy. “By making the US and energy exporter, the carbon tax ensures that energy remains less expensive here than in energy-importing countries.”
  • Reductions in air pollution. The Harvard Medical School estimates that air pollution from coal-fired power plants in the US alone costs between $66 billion to $216 billion per year. “The carbon tax remedies this by bringing all energy costs to their true value by 2025,” Hartung states.
  • Stopping global warming. The carbon tax could result in the US being “carbon-neutral” in about 50-70 years and help other nations achieve the same goal “before [global warming] causes severe harm to the world’s population, economy and ecosystems” by reducing carbon and greenhouse gas emissions while simultaneously increasing carbon sinks.
  • Boosting economic growth. The true cost of energy was about 13% of GDP in 2011 with the currently excluded external costs of fossil fuels added in, according to Hartung. That distorts energy market prices in the favor of greater fossil fuel consumption. By leveling energy costs and putting them on an apples-to-apples basis, the carbon tax “decreases the true cost of energy to about 9% TO 11% of GDP by 2025 and 5% to 7% of GDP by 2050. The resulting secure, clean, and affordable energy stimulates sustainable economic growth.”
  • Tax reform and simplification. The carbon tax less carbon credits would net the government more than $2 trillion in new taxes over the next 10 years and about $20 trillion by 2050, Hartung asserts. Internalizing now externalized fossil fuel costs would also mean we could phase out all the bewildering variety of “unsustainable government mandates, tax credits, and subsidies for alternative and renewable energy resources.”

Concluding his advocacy, Hartung writes:

“The U.S. is in a unique position to benefit from a carbon tax because of the size and competitiveness of its energy markets, the quantity and diversity of its domestic energy resources, and the breath and depth of its technological, business, and entrepreneurial capabilities.

“Most other countries will also benefit from implementing their own carbon tax. The U.S. can encourage them by bilaterally eliminating carbon import taxes from countries that have a similar carbon tax in place. Enlightened self-interest will trigger a domino effect, as most countries will want to secure the advantages of a carbon tax and avoid carbon import taxes on their exports to the U.S. market.”

* Graphic image credit: FossilTrax

Andrew Burger
Andrew Burger
A product of the New York City public school system, Andrew Burger went on to study geology at the University of Colorado, Boulder, work in the wholesale money and capital markets for a major Japanese bank and earn an MBA in finance.

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