Solves --- carbon tax is key to a sustainable transition while also stimulating the economy and investment

There are several ways that the United States could make a significant contribution to the global fight against climate change. We could take President Obama’s action on new power plants to the next level and use the Clean Air Act to reduce pollution from existing power plants and other major sources of emissions. The existing regional programs that charge a fee for pollution could be strengthened and broadened to cover more of the country, or Congress could get involved and put a nationwide price on carbon by creating a carbon tax.∂ Before diving into specifics on a national carbon tax, it’s important to recognize that there are countless ways to put a price on carbon. A cap-and-trade system is one such method, and it’s certainly possible to design a progressive cap-and-trade system. In such a system, a strict cap is set on national pollution, and polluters must have permits for all of their pollution. These permits are freely traded so that companies can reduce their pollution profit by selling permits to other companies that may need more pollution allowances. Analysis showed that the cap-and-trade bill passed in the U.S. House of Representatives in 2009 would have benefited low-income people, reduced the deficit, protected vulnerable industries, reduced pollution, and stimulated investment. That’s why CAP, along with private businesses and a bipartisan majority of the House of Representatives, supported the bill. Unfortunately, it failed to muster the necessary support in the Senate and was never enacted.∂ Three years later cap and trade is off the table largely because of a polluter-funded effort to deny climate science and delay action on pollution reductions. But Hurricane Sandy, the fiscal cliff, and the debate over clean energy incentives have together made it clear that we must put a price on carbon—and we must do it soon.∂ Given the track record of climate legislation in Congress—including the failed effort to pass the cap-and-trade bill in 2009—enacting a carbon tax poses more of a challenge than either expanding the regional carbon-pricing actions or using the Clean Air Act to regulate all power plants. While both of these alternatives are steps in the right direction, a national carbon tax would be able to address more than just our environmental concerns. In addition to mitigating the effects of climate change, a carbon tax could help solve our country’s budget crisis and provide revenue for new job-creating investments in clean energy infrastructure. By raising new funds, driving new investments, and reducing the likelihood of the most catastrophic consequences of climate change, a carbon tax is a tool that can take on our country’s three most pressing challenges: the deficit, joblessness, and the climate crisis.∂ In this issue brief we describe some of the key questions Congress needs to answer in designing a carbon tax. We lay out the principles for making sure that a carbon price puts our country on a progressive path to future prosperity and describe why a carbon tax is a desirable way to price carbon. We then turn to the issues in collecting the necessary revenue. Finally, we discuss how to use the revenue to most effectively solve the challenges facing our country.∂ Key principles for a progressive carbon tax∂ As with most energy policies, the details of a carbon tax are critical to accomplishing its goals. A well-designed pricing system can create jobs, reduce greenhouse gas pollution, and have fair impacts across all regions and income groups. To ensure this positive outcome, the United States should adopt a carbon pricing system that embodies progressive principles of fairness, environmental safety, and economic growth. The pricing system should:∂ Be sufficiently robust that it leads to meaningful reductions in greenhouse gas pollution, getting us on a path that helps us avoid the most catastrophic effects of climate change. In addition to being high enough to affect pollution rates, the tax should also increase over time and be applicable to non-carbon-dioxide greenhouse gases such as methane. This would both ensure a continuing reduction in the release of carbon dioxide and also encourage companies to move toward cleaner energies instead of different dirty ones.∂ Encourage businesses to make new investments in energy efficiency and renewable energy to reduce greenhouse gas emissions. This will stimulate the economy and put people back to work in the burgeoning clean-tech and green-jobs sectors.∂ Reduce—not increase—economic vulnerability of low-income households by ensuring that they are fairly compensated for any increase in energy prices.∂ Have appropriate mechanisms to protect existing American businesses and prevent so-called pollution leakage to countries without similar systems in place. Leakage occurs if highly polluting industries simply move to other countries that don’t have a comparable limit on pollution; in this way, they can continue business as usual without stricter environmental regulations. Leakage can also happen if domestic industries shut down, causing us to import goods from other countries.∂ Reduce the budget deficit to prevent draconian cuts in vital domestic programs by raising revenue from the tax.∂ The remainder of this issue brief explains how to design a carbon tax that meets these criteria.∂ Why a carbon tax is the best solution∂ Although it is unlikely that Congress will attempt to pass federal cap-and-trade legislation again in the near future, there are alternatives to putting a price on carbon—including the carbon tax, which is getting significant attention today from lawmakers and thought leaders across the political spectrum. The basic mechanics of a carbon tax are very simple: A tax is assessed on each ton of greenhouse gas pollution, the tax is paid to the government, and the government uses the money for either targeted spending or general usage. The tax will discourage pollution, therefore discouraging the use of fossil fuels while promoting cleaner energies. It can be increased over time to continue incentivizing polluters to lower their emission rates.∂ A carbon tax does have a critical distinction from cap-and-trade. With the carbon tax, the price is fixed, and the market responds by reducing carbon pollution to a point where it is cheaper to pay the tax than reduce the pollution. With cap-and-trade, though, the amount of pollution reduction is set by law, while the market responds by setting a price for pollution at the point that reflects the amount of pollution that must be reduced. The difference is cost certainty versus emissions-reduction certainty. For some pollutants such as sulfur dioxide or nitrogen oxides, the emissions certainty is very important. With greenhouse gas pollutants such as carbon dioxide, on the other hand, atmospheric concentration will determine the impacts of climate change. This means that the reductions in greenhouse gas pollution need not be as precise as those for conventional pollutants, as long as we meet longer-term goals such as reducing pollution 17 percent from 2005 levels by 2020 and 80 percent by 2050. A carbon tax of $15 to $25 will achieve these levels of reductions by incentivizing companies to lower their pollution rates to the desired levels, making it an effective solution to curbing greenhouse gas pollution.∂ The cost certainty implicit in a carbon tax could also be very useful in driving investments in efficiency and new clean technologies. For long-lived assets such as power plants and factories, knowing what the cost of carbon will be in the future makes planning those investments much easier. A carbon tax will also incentivize the use of non-fossil-fuel-based energy, causing an economic boost in the green-jobs and clean-tech markets.∂ There are two important sides to a carbon tax: how the revenue is collected and where the revenue goes. Getting the right mix of policies on both sides of the equation will ultimately determine whether or not a carbon tax achieves the aforementioned goals.