There’s a blatantly obvious way for the US to fight climate change and pay for new infrastructure: a carbon tax

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  • If lawmakers don't pay for their infrastructure spending plans, the economic returns could be smaller and it would make our already unsustainable fiscal outlook worse.
  • A price on carbon would raise money for infrastructure projects, deter fossil fuel use, and encourage new private sector innovation in the clean energy space.
  • Other countries have used carbon taxes to reduce carbon emissions without harming economic growth.
  • Maya MacGuineas is the president of the bipartisan Committee for a Responsible Federal Budget.
  • This is an opinion column. The thoughts expressed are those of the author.
  • See more stories on Insider's business page.

Before taking office, President Joe Biden's campaign plan made clear that his administration would make infrastructure spending and climate change a priority. It's clear he won't have trouble finding support in Congress, especially on infrastructure, where members of both parties have floated trillions of new spending.

But not much time has been dedicated to how massive public investments in infrastructure and climate change should be financed, or how to involve the private sector in tackling these challenges. Relying on borrowing would be counterproductive - studies have found that results from infrastructure spending are better when actually paid for - and could add to an already poor fiscal outlook. The national debt was already growing faster than the economy prior to the pandemic, and borrowing to fight COVID-19 and support the economy has pushed deficits to all-time highs.

However, by raising revenue from carbon-emitting activities, we can simultaneously help fund new infrastructure projects and deter the use of fossil fuels. Some other taxes have similar dual features of generating revenue and putting a price on activities that harm society as a whole, like cigarette taxes. But carbon taxes are especially unique in how this one policy can achieve so many goals at once.

Carbon-based growth

A carbon tax would regulate pollution far more efficiently than the mounds of regulations and restrictions on the books. By design, it would encourage businesses to continue to innovate and invest in new clean energy breakthroughs. Raising revenue, protecting the environment, replacing inefficient regulations, and prompting free market solutions is a rare policy no-brainer, which is why many leading industry groups have recently come out in favor of a carbon pricing system for the US.

Implementing a carbon tax wouldn't be novel. First enacted in Finland in 1990, the use of carbon taxes isn't new, and they're relatively common throughout Europe. According to the World Bank, carbon taxes levied in European countries typically cover around a third of greenhouse gas emissions in those nations, though Ireland (49%) and Norway (62%) cover a broader base of activity.

The Congressional Budget Office estimates that a $25 per metric ton carbon tax would raise about $100 billion per year in the US This could help offset President Biden's infrastructure and clean energy plan, which the Committee for a Responsible Federal Budget estimates would cost about $3 trillion over a decade.

Raising revenue to fund green investments is one thing, but a price on carbon adds other benefits. A recent study found that Europe's carbon taxes and emissions trading system have lowered greenhouse gas emissions and would do the same for the US. The study's authors modeled a $40-per-ton carbon tax in the US covering 30% of emissions and found it would not harm jobs or economic growth.

That last result - that a tax increase wouldn't harm the economy - may sound counterintuitive, but it makes sense in this case. A carbon tax doesn't deter overall investment or jobs so much as shifts them to a different form of energy that doesn't inflict a widely-recognized harm on society. That market opportunity is why a state like Texas, which is heavily invested in fossil fuels, is also a national leader in both wind and solar. To be clear, such a transition wouldn't be seamless, and helping those displaced by these policy shifts should be a priority. But the good news is it could avoid the economic damage often associated with ill-conceived taxes.

Carbon pricing skeptics will point out that it would impose a larger burden on low-income households, but that can be addressed with a carbon dividend that provides those households with a yearly rebate to offset the anticipated rise in costs. Canada and Switzerland use this approach and a US carbon tax could use a modestly priced dividend to shield lower-income households from higher energy bills while still achieving the tax's two primary aims: moving away from fossil fuels and raising revenue for costly public investments.

Public policy always involves tradeoffs, and responsibly pursuing anything approaching $3 trillion of infrastructure and environment spending is no easy feat. If policymakers don't adopt a carbon tax, there are other options to finance these initiatives. The federal gas tax, which hasn't been raised since 1993, is long overdue for an increase. A vehicle miles-traveled tax would make sense as more all-electric automobiles hit the roads. Policymakers would be shortsighted not to consider these taxes as a no-brainer.

Maya MacGuineas is the president of the Committee for a Responsible Federal Budget in Washington, D.C.

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