New Plan Would Offset Carbon Tax With Payday Savings

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.