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Three birds, one stone

Conor Durkin | Sunday, February 10, 2013

As President Barack Obama begins his second term, his agenda and the agenda of Congressional Republicans seem to have an interesting degree of overlap and conflict. With a bipartisan group of Senators creating a plan for immigration reform, for instance, it appears we may finally be able to resolve the issue early on this year. Yet in many other instances, the GOP’s central focus on deficit reduction and the economy makes it easy to imagine Obama will be unable to pursue other progressive objectives, such as addressing climate change. But what about a policy to help the environment, the economy and the deficit at the same time? Believe it or not, there’s a policy that could do exactly that – a carbon tax.
A carbon tax is fairly simple to understand. Such a tax would put a price on the carbon emissions caused by the burning of any fossil fuel, like the emissions from a factory or the gasoline that goes in your car. The theory behind such a tax also makes sense. Causing pollution creates what’s known as a negative externality, a situation in which those using a product gain all of its benefits but don’t bear all of its costs. Using gasoline, for example, emits pollution into the atmosphere, but drivers don’t bear the costs of this negative effect. Implementing a carbon tax helps to rectify this problem by making individuals bear more of the costs they impose on the rest of us.
It’s easy to see how a carbon tax is the right approach for environmental and energy policy. The current regulatory approach relies on CAFE standards to reduce emissions by dictating what cars manufacturers are allowed to produce. A far more effective approach in my view is to let manufacturers decide which cars to produce, but to let consumers bear the full weight of the costs of driving. Instead of regulating what manufacturers can make, a carbon tax would instead change people’s incentives to drive and would elevate demand for more fuel-efficient cars, giving car companies a strong incentive to make better and more fuel-efficient vehicles instead of merely ensuring their cars comply with some arbitrary standard. In energy policy, I also believe it’s important to ensure we have a true level playing field without the government picking winners and losers, as we’ve come to hear about a great deal. But without some sort of carbon tax, the playing field isn’t level – pollution-causing forms of energy like gasoline and coal have an implicit advantage over green energy, since consumers don’t bear the full cost of the action. Instituting a carbon tax would eliminate this problem by ensuring consumers bear all benefits and costs of the use of that energy, instead of biasing the system in favor of dirtier sources of energy by having society as a whole bear their negative effects at no cost to the producer.
It’s equally important to understand how to use a carbon tax to help with our economy and deficit reduction. Luckily, the government in British Columbia has provided us with a perfect case study of doing just that. A few years ago, British Columbia implemented a carbon tax of $25 per metric ton of carbon, which has since been raised to $30 per ton. As a result of the revenues from this tax, the government was able to massively reduce other tax rates, like their corporate tax rate, which now stands at only 10 percent. Compared to our 35 percent tax rate – the highest in the industrial world – this seems absurdly low. I’m not generally enthusiastic about pointing to Canada as an economic role model for the United States, but here the results seem clear. Estimates vary on the revenues from a carbon tax, but most ballpark a figure between $100 billion and $150 billion per year for a carbon tax of $20 to $30 per ton. For the sake of comparison, President Obama’s “Buffett Rule” gimmick would bring in only $40 billion over a decade. This revenue then could and should be used to dramatically reduce both corporate and individual income tax rates, helping to boost our economy while protecting the environment. Moreover, a portion of the revenue could go directly to deficit reduction, ensuring that our long-term fiscal challenges are dealt with as well.
I’m often struck by liberals who think we must take immediate action on long-term issues like the environment but not on long-term issues like the national debt, and am sometimes equally as puzzled by my compatriots on the right who have the opposite approach. To both camps I ask, “Why not do both?” Let’s kill three birds with one stone and put a price on carbon in a manner that will help the environment, the economy and the national debt.

Conor Durkin is a junior studying economics and political science. He can be reached at cdurkin@nd.edu
The views expressed in this column are those of the author and not necessarily those of The Observer.