Monday, February 13, 2017

The Distributional Consequences of the Carbon Tax from the Climate Leadership Council

Martin Feldstein, Ted Halstead, and Greg Mankiw (FHM) are singing the praises of a proposed carbon tax:
First, the federal government would impose a gradually increasing tax on carbon dioxide emissions. It might begin at $40 per ton and increase steadily. This tax would send a powerful signal to businesses and consumers to reduce their carbon footprints. Second, the proceeds would be returned to the American people on an equal basis via quarterly dividend checks. With a carbon tax of $40 per ton, a family of four would receive about $2,000 in the first year. As the tax rate rose over time to further reduce emissions, so would the dividend payments … According to a recent Treasury Department study the bottom 70 percent of Americans would come out ahead under a carbon dividends plan. Some 223 million Americans stand to benefit.
The study by John Horowitz, Julie-Anne Cronin, Hannah Hawkins, Laura Konda, and Alex Yuskavage is interesting in many ways including:
To examine the effects of a sample carbon tax, OTA estimated the 10-year revenue effects of a carbon tax that started at $49 per metric ton of carbon dioxide equivalent (mt CO2-e) in 2019 and increased to $70 in 2028. We estimate that such a tax would generate net revenues of $194 billion in the first year of the tax and $2,221 billion over the 10-year window from 2019 through 2028. This revenue could finance significant reductions in other taxes. In 2019, this carbon tax revenue would represent approximately 50 percent of projected corporate income tax payments or 20 percent of the OASDI portion of the payroll tax. If the revenue were rebated to individuals it would amount to $583 per person in the U.S.
The authors are looking at a large carbon tax than FHM are proposing, which is why their estimate of the effect of a per person rebate is larger than $500. Table 4 on page 20 provides an estimate the percentage increase in the pricing of various forms of energy. Most interesting is table 6 on page 26 entitled “The Distribution of $49/mt Carbon Tax and Revenue Recycling as it explores the distributional effects of several options including “no revenue recycling”. While FHM advocate complete revenue recycling, some might advocate using the extra revenue to increase certain forms of government spending such as green technology, infrastructure, and even transfer payments such as medical care and Social Security. The reductions in after-tax income from this progressive agenda would tend to hit those with higher incomes more. The authors also estimate the effects of a revenue neutral carbon tax where either payroll taxes or corporate profits taxes are reduced. If the latter is what the politicians end up doing, it follows that the well to do benefit on net while the rest of us pay more.


Unknown said...

I would like to know the productivity impact of carbon taxes in the general economy.

As it stands right now, the physical work provided by fossil fuel systems (in areas such as construction, maintenance, transport, agriculture) cannot be substituted in an equivalent fashion with low or zero carbon alternatives. Vehicles and equipment cannot run as long or as far or as fast on batteries and the like.

So isn't it likely that carbon prices will tend to instill an underlying pressure of stagflation within the economy, with its attendant reductions in real wages and employment?

This would not be catastrophic at these pricing levels, but nevertheless, wouldn't the accumulated costs at all levels of supply and value chains, tend to push marginally profitable businesses and land out of productive use? Essentially shrinking the economy at the margins at a time when small and isolated communities are already struggling to maintain viability.

Anonymous said...

It would require a really large tax and exorbitantly high gasoline taxes to drive a switch to EVs or even high efficiency ICE vehicles.
This is why we have CAFE standards the same as we have appliance standards.
The CAFE standards can be enforced by higher gasoline prices, but requirements for percentage of EVs in the fleet or CAFE mileage standards help drive the options available to consumers.
jonny bakho

Unknown said...

It is not clear to me why using carbon tax revenues to reduce the wage taxes now funding the SS-Medicare trust funds would be regressive. How well supported it that assertion?

ProGrowthLiberal said...

Unknown - take a look at table 6 on page 26 of that report. If this carbon tax replaces the payroll tax, we have a more progressive tax system as the after-tax income of lot of folks rise while it is the very rich who will see a fall in after-tax income. So whatever that assertion was - it is not supported by their research.