January 31, 2011

TAX WHAT YOU DON'T WANT:

The Carbon Tax Miracle Cure: The 'bang for the buck' from a phased-in CO2 levy would be infinite at first—lots of jobs at zero cost to the federal budget. (ALAN S. BLINDER, 1/31/11, WSJ)

Under this policy approach, decision-making is left in private hands and the jobs created will be in the private sector. Furthermore, the policy would not cost taxpayers a dime. In fact, it would eventually reduce the federal budget deficit significantly. Plus, there are a few nice side effects, like reducing our trade deficit, making our economy more efficient, ameliorating global warming, and showing the world that American capitalism has not lost its edge.

What is this miraculous policy? It's called a carbon tax—really, a carbon dioxide tax—but one that starts at zero and ramps up gradually over time.

The timing is critical. With the recovery just starting—we hope—to gather steam, this is a terrible time to hit it with some big new tax. Hence, while the CO2 tax should be enacted now, it should be set at zero for 2011 and 2012. After that, it would ramp up gradually. Adapting some calculations from a recent paper by Prof. William Nordhaus of Yale, the tax might start at something like $8 per ton of CO2 in 2013 (that's roughly eight cents per gallon of gasoline), reach $25 a ton by 2015 (still just 26 cents per gallon), $40 by 2020, and keep on rising. I'd like to see it top out at more than $200 a ton in, say, 2040—which is higher than in Mr. Nordhaus's example.

But the time pattern is more important than the exact dates and numbers. What's critical is that we lock in higher future costs of carbon today.

Posted by Orrin Judd at January 31, 2011 7:26 AM
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