It's just two simple words, but the term "carbon tax" manages to represent two ideas rather unpopular with most Republicans: controlling carbon emissions and imposing a new tax.
But for those who believe the U.S. should contribute to combating climate change, a carbon tax incentivizing renewable energy consumption has many merits. In fact, it's the least costly way of meaningfully reducing greenhouse gas emissions.
That's because a tax delivers just the right amount of a market signal.
Suppose you're a manufacturer.
Your reactions to a carbon tax might include switching to a less carbon-intensive fuel source or altering your manufacturing process to reduce the amount of energy you use. If you discovered such changes would cost more than simply paying the tax, you could of course just pay the tax. But if it made business sense, and your operations were easy enough to change, you'd adapt, thereby contributing to the reduction of emissions.
This approach minimizes the total cost to the economy by changing the behavior only of businesses with low-value, carbon-intensive activities.
Secondly, rather than restricting a market activity we want to encourage, a carbon tax takes aim at pollutants we want to eliminate. It's a good alternative to heavier taxes on labor, personal income and business profits.
A third reason economists like carbon taxes is because unlike regulations, renewable portfolio standards, or mandates, they generate revenues for governments. The $125 billion experts estimate could be raised each year by a carbon tax in the U.S. could be committed to useful purposes.
While some skeptics might not trust the government to make good use of such funds, legislation could be crafted to mandate that carbon tax revenues go toward causes with bipartisan support, like deficit reduction or shoring up the Social Security system.
Some countries have even studied providing what's called a carbon dividend, a lump sum refund of carbon tax revenues to every household.
Finally, with carbon taxes, you're able to avoid the process of selecting winners and losers among industries and companies caused by other forms of regulation.
The Environmental Protection Agency's Clean Power Plan rules, for example, are focused on the power industry. The rules would increase electricity costs while doing little to actually reduce emissions.
A carbon tax looks more broadly, spreading out economic impacts while making the maximum impact on emissions.
