Should the United States adopt a tax on carbon? – Opposing arguments

Yesterday I introduced a discussion of carbon tax as a method to address climate change that appeared in a recent issue of the Sioux Falls Argus Leader. We first shared the NO argument written by Dr. Mark J. Perry, professor of economics at the Flint campus of the University of Michigan and a scholar at the American Enterprise Institute in Washington. Dr. Perry argued a carbon tax would cripple our already sluggish economy.

Today we share the YES argument, written by Kenneth R. Richards, a professor in the School of Public and Environmental Affairs at Indiana University and an affiliated professor of law. Richards argues a carbon tax will blunt extreme climate change and boost economy by shifting demand “away from energy use toward labor and capital investment.” A key to the U.S.’ savings in emissions and dollars, however, would be a simultaneous reduction in income taxes, equal to the revenue raised by the carbon tax.

Should the United States adopt a tax on carbon? Yes, it would spur growth, innovation

When a group of players as disparate as Al Gore, the International Monetary Fund and President Reagan’s Secretary of State George Shultz all agree on something, it might be worth taking note.

Emphasizing different factors, many policy commentators and analysts, conservatives and liberals alike, are advocating a new slant on taxation – shifting some of the burden to carbon emissions.

For reasons of both environmental protection and reduced government interference in the economy, the United States should adopt a tax on carbon.

While the former reason is perhaps the more important from a global perspective, the latter is the easier to support in today’s challenging economic climate.

The public finance argument for a carbon-tax starts with an important observation. Taxes interfere with price signals and consequently distort the market, thereby imposing a social cost, referred to by economists as excess burden. A well-designed tax system minimizes the excess burden on society.

A recent study by economists Ian Parry and Roberton Williams points to an opportunity for a win-win change in our tax system. They demonstrate that a tax of $33 per ton of carbon dioxide – about 25 cents on a gallon of gas and less than a couple of cents per kilowatt-hour of electricity – could simultaneously reduce U.S. carbon emissions by 8.5 percent and save the economy $4.5 billion per year, even ignoring environmental benefits.

The key to the savings? Congress must reduce income taxes by the same amount as the revenue raised from the carbon tax; it must resist the temptation to earmark the funds.

Focusing purely on the financial gains from a better tax system misses an important reality. We need to take seriously the potentially enormous and negative effects of climate change.

The vast majority of the evidence supports the conclusion that the world faces a real threat from sea level rise, water resource disruption, temperature rise, and loss of biological resources.

A tax of this magnitude would reduce our emissions. It would work together with the income tax reduction to shift demand away from energy use toward labor and capital investment.

Perhaps most important, a significant carbon-tax would signal our global leadership role in environmental protection.

Far from being a drag on the economy, the change would spur growth and innovation by reducing income taxes that discourage labor and capital investments.

Kenneth Richards can be emailed at kenricha@indiana.edu.

Both carbon tax arguments were recently made available in the PRO/CON feature of the McClatchy-Tribune news service and were printed in the Sunday, August 19 edition of the Argus Leader of Sioux Falls.

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