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Can the U.S. put a Price on Carbon?

Can the U.S. put a Price on Carbon?

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Smokestacks. Image credit: Dori

The American public is seemingly reluctant to adopt a carbon tax or cap-and-trade system according to a recent Brookings Institute report. Either policy would aim to ameliorate a long-term issue at the debatable expense of short-term economic growth and job development. That being said, tax reform remains a pressing concern for Congress as the annual budget deficit is expected to exceed $1 trillion again this year. With neither party showing an inclination toward raising income taxes, taxing carbon offers an effective avenue for cutting at least a small portion of that deficit while not touching marginal income tax rates.

Unemployment remains at 8.2 percent, and economic gains are mounting from increased oil and gas production making a carbon-pricing policy a doubtful component of either President Obama or Mitt Romney’s campaign platforms.  In fact, neither Mitt Romney nor President Obama has even hinted at applying a price to the greenhouse gas.

Taxing carbon raises operating costs for CO2 emitters. This puts a price tag on units of pollution, and offers incentives for energy producers to develop lower emission technology- a positive step toward climate mitigation. Likewise, cap-and-trade systems (like the one currently applied to sulfur dioxide emissions) demonstrate an effective, market-based approach for emissions reduction. For instance, SO2 emissions have been halved since the 1990 Clean Air Act required emissions to be cut by precisely that amount. Meanwhile, the costs associated with those reductions have proved much lower than analysts initially projected.

In his 2008 campaign, President Obama included a cap-and-trade proposal. Since his election, though, the President has abandoned his push for the market based approach after the Senate failed to pass the American Clean Energy and Security Act which proposed an economy-wide-cap-and-trade system. Instead, the administration has focused on investing in renewable energy sources and mandating energy efficiency standards for consumer goods ranging from automobiles to light bulbs.

While these initiatives are certainly steps in the right direction to curb U.S. emissions, research and experience suggests a carbon pricing policy would be more cost-effective. As economist Ted Gayer points out, a carbon pricing policy utilizes market mechanisms to establish the lowest-cost method of emissions reduction. On the other hand, investing in specific renewable energy projects with federal tax dollars poses significantly more risks and cannot ensure positive returns. For instance, First Solar, Inc. has seen its share price decline 62.3% despite receiving over $3 billion in Department of Energy Loan guarantees.

The correlation between emissions and climate change has become increasingly apparent. In the face of mounting deficits, it is essential for the U.S. Congress to adopt the lowest-cost method of reducing emissions in an effort to mitigate climate change and thus improve national security. Applying a price tag to carbon offers just that opportunity. But, challenged by a fragile economy, neither 2012 presidential candidate appears ready to embrace such a policy; although it would greatly reduce the U.S. energy sector’s carbon footprint and move America towards a more secure future.

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