What is a carbon tax? And could it work?

The answer

Skocpol was originally assigned the task of researching why cap and trade failed during the hayday of the Democrats’ supermajority in 2009. Cap and trade, an extremely effective measure to curb, reduce, and eventually eliminate negative externalities, was so effective in curbing acid rain that no one even talks about it anymore. So why wouldn’t it work on carbon emissions? The problem is that it’s a tough concept to get. It was too easy, said Skocpol, for lobbyists and conservative media to twist cap and trade and make it seem like it was some underhanded, devious socialist manifesto (they did dub it “cap and tax”, for instance).

The beauty of the carbon tax, she says, is that it’s so simple. Here’s her formula for success:

Implement a carbon tax. Say, $25 per ton, just for example.
Three quarters of that money gets returned to citizens in September of every year as a “green citizens dividend”.
The legislation and enforcement are simple and transparent.
Most families come out ahead–and all can do better with energy saving efforts. As people see that electricity costs more, they have more incentive to count kilowatts.
The remaining money goes to deficit reduction, and to invest in clean energy technology, energy efficiency, and alternative transportation. A recent study said a $20 per ton carbon tax would reduce the U.S. deficit by $1.2 trillion in 10 years, for instance.

While Skocpol has her share of critics, the concept is fundamentally sound. People prefer a carbon tax to cuts in Federal spending by a ratio of roughly 4.5 to 1, and prefer a carbon tax to cap & trade models. Industry likely prefers a cap and trade system to a carbon tax, but the bottom line in this twitterverse that we live in is that things that are difficult to explain in 160 characters or less have less chance of success than those that are easy. And giving back to citizens, every September, will help assure continued political support for a carbon tax.

That the money is simply given back to citizens with no strings attached is meaningless. Those citizens could go out and buy gas guzzling humvees with their green citizen dividends, and we’d still come out ahead. Why? Because industry is responding to the price on carbon, not on what happens to the money. Once companies have to pay more for their utilities, they’ll cut. Once the profit margin is lessened on dirtier technologies, investments on cleaner technologies will make more economic sense. As a corollary, look at cigarette taxes. What happens to the extra tax revenue on cigarettes is not the main issue–the main issue is that now people can’t afford as many cigarettes. So they cut back or quit. The economic incentive here would be the same–people will cut their utility bills, or quit and go off grid.

We’ll work with folks on those humvee purchases later.