A Proposal for a U.S. Carbon Tax Swap: An Equitable Tax Reform to Address Global Climate Change

A Proposal for a U.S. Carbon Tax Swap: An Equitable Tax Reform to Address Global Climate Change

Gilbert E. Metcalf,
Discussion Paper 2007-12, October 2007
The Brookings Institution

Abstract:

This paper describes a carbon tax swap that is both revenue and distributionally neutral. The tax swap would levy a tax on greenhouse gas emissions. The revenue would be used to fund a reduction in the income tax, tied to earned income. Specifically, the proposal calls for a tax on greenhouse gas emissions at an initial rate of $15 per ton of carbon dioxide equivalent and gradually increasing over time. A refundable tax credit would be offered for sequestered greenhouse gases and other approved sequestration activities. In addition, to offset the new carbon tax, the proposal would implement an environmental tax credit in the personal income tax equal to the employer and employee payroll taxes on initial earnings up to a limit.

This paper begins with a discussion of the problem of greenhouse gas emissions and providesa rationale for setting a price on carbon emissions. It then provides a distributional analysis of the proposal described above. Following this analysis, it makes a case for why carbon pricing through a tax should be considered a viable alternative to carbon pricing through a cap-and-trade system. It concludes with a response to various objections made to carbon pricing in general and a carbon tax in particular.

※ memo:

The National Oceanic and Atmospheric Administration(NOAA) reports that ... the rate ofwarming has accelerated over the past 30 years, increasing globally since the mid-1970s at a rate approximately three times faster than the century scale trend. The past nine years have all been among the 25 warmest years on record for the contiguous U.S., a streak which is unprecedented in the historical record” (NOAA 2007).

IPCC's Working Group II enumerates (in a report) a number of potential impacts, noting that, by 2020,“between 75 and 250 million people are projected to be exposed to an increase of water stress due to climate change. If coupled with increased demand, this will adversely affect livelihoods and exacerbate water-related problems” (p. 8). Africa is especiallyat risk. ... In some countries, yields from rainfed agriculture could be reduced by up to 50% by 2020” (IPCC 2007b, p. 8). ... North America will also be impacted. The report notes the issues of reduced snow pack in western mountains and decreased summertime water flows, for example. This would place additional strains on already taxed water systems in the West. The risk of forest fires will rise, and heat-sensitive crops(such as corn and soybeans) may be adversely affected.

... Weitzman (2007) argues that the fundamental uncertainties associated with catastrophic climate change (albeit with a low probability of occurring) trump any discussion over the appropriate discount rate to use in an intertemporal cost-benefit analysis as undertaken by Stern or others. In short, it would be prudent to take some sort of action sooner rather than later. A modest initial carbon price with a gradual ramping up over time would start the United States down a path toward GHG reductions.