REP. JOHN DINGELL

(D., Mich.) entered Congress when a gallon of gas cost 29 cents and powered the average car for 14 miles.

Ford's

sits on his turf. Dingell's wife is a longtime senior executive at

General Motors

So when the chairman of the House Energy and Commerce Committee announced last week that he would soon propose a steep new "carbon tax" on fossil fuels he didn't bother hiding the fact that it was just a stunt, like driving on two wheels or tinkering with hydrogen-powered prototypes.

Dingell is under pressure from fellow congressional Democrats to deliver bills limiting greenhouse emissions, and potentially compelling auto makers to make more fuel-efficient cars. So he's anxious to show that Americans aren't really ready to pay the full costs of fixing global warming. "I sincerely doubt that the American people will be willing to pay what this is really going to cost them," he said on C-SPAN.

It's not a controversial point. Motorists would likely not look kindly on a big tax hike at the pump when they're already paying $3 a gallon and the planet be damned. And the Democrats don't see calls for self-sacrifice as vote winners in next year's elections.

Only economists didn't get Dingell's joke, at least the many of them who favor a carbon tax as the best way to conserve fossil fuels. Gilbert Metcalf, economics professor at Tufts University, proposes to shore up political support for a national carbon tax by pairing it with a reduction in the payroll tax. He says his proposal has garnered interest from legislators.

House and Senate Democrats now are writing bills that would require factories and power plants to reduce emissions of heat-trapping gases. Most of these proposals are for cap-and-trade systems similar to the European Union Emissions Trading System. That's one way to limit emissions and one that's come under heavy criticism for failing to reduce them in line with European goals.

A tax on carbon emissions is another. According to Metcalf, his tax, essentially a straightforward pollution tax, would appeal to consumers "because of the opportunities for using the tax revenues to lower other distorting taxes," he writes in his paper, titled "A Green Employment Tax Swap: Using a Carbon Tax to Finance Payroll Tax Relief."

The environmental benefit of the scheme would be realized over the long term, according to Metcalf. "People will buy more efficient cars; electric utilities will shift away from coal to natural gas and other energy sources," he says. And most importantly, the reform uses the carbon tax $15 per metric ton of CO2 to reduce the payroll tax by funding a rebate to workers in each household equal to their first $560 in payroll taxes.

The biggest loser would be the coal industry, says Metcalf. His proposal could reduce coal consumption by nearly one-third, while lowering carbon emissions by 12.1% over a three- to five-year period. We asked Metcalf for the gritty details.

SmartMoney.com: How does your proposed carbon tax work?

Gilbert Metcalf: The basic idea is that we implement a carbon tax $15 per ton of CO2 equivalent. We raise revenue, about $80 billion a year. That revenue could be used to cut some taxes. I focused on cutting the income tax so it would be distributionally neutral.

The general concern about this is that an energy tax is regressive, that it hurts poor people more than rich people. My argument is we can institute a tax reform and it can be neutral.

SM: Do individual consumers get taxed or companies?

GM: The tax is levied at an upstream level. In other words, you put the tax on coal mines as they mine the coal and send it out to electric utilities. We put the tax on oil refineries for all the petrol coming through, and on natural gas at the well head, essentially. For imported natural gas and coal, the tax is put on at the border. So no consumer would have to pay this tax directly; they pay it in the form of higher prices.

Our sense is that the short-run impact will be fairly minimal. The larger impact will be in the long run. People will buy more efficient cars; electric utilities will shift away from coal to natural gas and other energy sources. The impact on the coal industry they bear the largest impact of this policy because coal is the most intensive carbon source we have. With any kind of carbon policy coal goes through a "valley of death" because their value goes down sharply whether it's a tax or a cap-and-trade system. Then it rebounds because as we put a price on carbon, it becomes cost effective to do carbon capture and storage. Once we start doing that in this country and globally, coal becomes a desirable fuel source. If we can capture and store the carbons, we don't have to worry about the greenhouse-gas emissions. The real problem for coal is the transition problem.

SM: Who benefits financially from this carbon tax?

GM: Every worker who pays payroll taxes will get a rebate, a check from the government, for the initial payroll taxes they pay up to a ceiling. [That's] based on the amount of revenue raised by the carbon tax. I estimate we'll be able to rebate up to the first $560 per year per worker of their payroll tax. You pay FICA taxes. If you pay a couple thousand dollars in payroll taxes, you would get a check from the government for $560. A worker who doesn't get as much would get maybe $400 back. The payroll tax is the largest tax workers pay. This is a way to reduce some of that tax burden.

SM: How much more would people be paying in everyday things including energy with your carbon tax? Would the payroll tax reduction be enough to offset those increases?

GM: [Look at] Table 6 [of my paper], income group three: The average household pays $487 in these carbon taxes in the form of higher prices of things they buy. Meanwhile, their payroll tax is going to be reduced by $428. So they're going to get back almost all the carbon tax they pay. The next group is going to get back on average more than they pay: $545 in carbon tax increases and $557 in payroll tax reduction. These numbers show you on average what's going on within varying income groups.

Households that use more than the average amount of energy will pay more in taxes. And ones that use less will end up doing better. It will be a wash. The first two income groups consist of a fair number of retired people who are not earning money, so wouldn't be eligible for a rebate, and low-income people. So the proposal would have to be adjusted, tweaked a little bit. You can offset the higher carbon taxes of retired people to increase their benefits. For poor, retired people, you have to increase their Social Security payments per year between $289 and $421. That will offset the amount paid in taxes.

SM: Rep. John Dingell said he plans to propose a carbon tax, knowing Congress and voters won't go for it. Why would your approach be different?

GM: Dingell's raising the old canard that Americans won't stand for a new energy tax. What the debate over the [Bill] Clinton BTU tax taught us was that Americans won't stand for an unfocused and poorly motivated tax with lots of loopholes for special interests.

I think the lesson from the BTU tax is that first you need to motivate the tax with a clear and simple rationale. The need to do something about global warming is no longer under debate in the U.S. and provides that rationale. Second, you need to create a package that is revenue neutral. My GETS proposal is both distributionally and revenue neutral. There's no reason Congress can't dedicate the carbon tax revenue to a special fund that is earmarked for income or payroll tax reductions.

SM: There was also an editorial in The Wall Street Journal this week saying a carbon tax would only make sense if it were offset by lower taxes on income tax rates and capital investment. The editorial said there's no way the current Congress would offset a new tax and that it would just pocket the extra revenue.

GM: No policy to reduce greenhouse-gas emissions will work unless it raises the cost of carbon. This is true for a cap-and-trade system as well as a carbon tax, as well as more indirect methods such as CAFE. It is peculiar that the [Journal] opposes carbon taxes if the alternative is to fall back on much more inefficient and ineffective systems to reduce emissions.

SM: What about the impact the tax would have on consumers once industries pass their own higher costs on to them? It wouldn't just be for energy products.

GM: Energy use is pervasive in the economy. It's important to track through the energy increases for all commodities. In Table 4 of the paper I listed price increases for industries that face the largest increases. I'm tracking price increases, including consumer products, food, toiletries, paper products. You find once you get past the top three, the price increases are not that big. Once you get past the top 10, the price increases are on the order of 1% of the cost of the good. So these are pretty small.

The reason the price increases for most products are small is because energy is a small share of the price of the product. We've cut in half our energy consumption per dollar of GDP. But we could do more.... So for most products, consumers won't even notice the price increase. They may notice it for gasoline. It's a $15-per-ton tax, which would raise the cost by 13 cents per gallon at the pump. That's pretty modest. In fact, if you look at swings in gasoline prices, we've seen swings of more than 13 cents in a month.