Backers of a carbon tax like to point out that it kills several birds with one large rock. You can cut emissions that lead to climate change and patch up national finances at the same time. What’s more, it is taking on a problem directly: taxing something normally means discouraging it.
Add in that an across-the-board tax is relatively fair (compared to, say, giving $535 million to a single solar company), and relatively easy to implement (easier, anyway, than cap and trade, which has a reputation for bureaucracy despite being "market-based"), and you see why economists and politicians of different stripes have supported the idea.
The latest proposal comes from representatives Henry Waxman and Earl Blumenauer, and senators Sheldon Whitehouse and Brian Schatz—all Democrats. It lays out per ton taxes of $15, $25, and $30, and annual increases of between 2% and 8%. The background document explains:
The discussion draft requires covered entities to pay a fee for each ton of carbon pollution reported under the existing Environmental Protection Agency (EPA) greenhouse gas emissions reporting rule. In contrast, previous proposals for a carbon tax have commonly levied the tax at the point of production or first sale of a fossil fuel. Advantages of the new approach include: more complete coverage of emissions; lower compliance burden for sources; lower administrative burden for the government; and appropriate deployment of agency expertise.
The proposal is framed as a debate document. It asks what we should do with the revenue raised:
What are the best ways to return the revenue to the American people? The discussion draft proposes putting the revenue toward the following goals, and solicits comments on how to best accomplish each: (1) mitigating energy costs for consumers, especially low-income consumers; (2) reducing the Federal deficit; (3) protecting jobs of workers at trade-vulnerable, energy intensive industries; (4) reducing the tax liability for individuals and businesses; and (5) investing in other activities to reduce carbon pollution and its effects.
Exactly how much money there would be to play with depends on several factors. A paper from the MIT Global Change Institute last summer predicted as much as $1.5 trillion over 10 years, based on a 20% fee, and annual increases of 4%. It’s likely that Republicans would only ever support returning revenue to taxpayers (in the unlikely event they supported a tax at all). But several academics have argued the most effective thing would be to reinvest in alternative energy.
The most advanced carbon tax regime is in British Columbia, which has reduced emissions, and decreased its deficit—just as carbon tax proponents have evangelized. China is the other major carbon tax regime, but its proposal is still on the drawing board.
Some may disqualify Waxman and co.'s proposal simply for being a tax, but their proposal bears thinking about. The alternatives in climate change policy—not to mention the budget debate at large—may be a whole lot worse.