Carbon tax: It's not coming soon

A US carbon tax would raise revenue for the federal government. But there are three reasons a carbon tax won't be part of any budget compromise in the next few weeks.

As the US speeds towards the fiscal cliff, COP 18 has commenced in Doha, add the lingering effects of Sandy with an initial cost estimate of more than $70 billion and the result is a lot of discussion and analysis of how a carbon tax could be (should be) part of a budget compromise.
 
There are certainly lots of reasons why a carbon tax as part of a budget compromise makes sense: reduced emissions, increased revenue without raising income rates, and more accurate pricing of energy are all extremely worthy outcomes. A carbon tax has a large scale model to use as a reference, as Australia recently levied a high-profile carbon tax, which offsets income taxes; and while there are complaints (especially early on in the process) the general reception has not been overly negative.

A carbon tax as part of the fiscal cliff resolution is a good idea, but it won't happen. Here are three reasons why not:

1. Timing and complexity. The need for action on a budget compromise, at least a framework, needs to be put in place very quickly, over the next few weeks. A carbon tax, as an offsetting revenue mechanism, is a new construct and one that would require many nuances in application to prevent unintended consequences (e.g., how to balance the impact on the rural poor where higher energy prices would have a disproportionate effect). Moving a carbon tax through the legislative process would also require a great deal of compromise and education regarding the potential impact, and many members of the current Congress don't appear to have the appetite (or ability) to take on a challenge of this scale at all, let alone quickly.
2. Cap and trade. It's already in place for about a third of the population, with RGGI in the Northeast and the new California cap and trade market. Add the European ETS and that Australia's tax is really just the first phase of what will eventually be an emission-trading platform, and there's already a lot of effort spent on getting cap and trade right. While a carbon tax is simpler in its administration, it is certainly not easier than building on existing regimes. The idea that the work that has been done so far on making cap and trade work efficiently in several markets, including US markets, would all be cast aside for an entirely new approach to pricing greenhouse gas emissions is being hugely underappreciated in the current carbon tax discussions.
3. Lack of will. Despite Sandy and its $70 billion price tag and the growing concern that the effects of climate change and the pace of positive feedback loops have been horribly underforecast, a large portion of Congress doesn't view pricing carbon as a valuable mitigation effort in the battle against climate change. Without more urgency (or basic understanding) inside Congres,s it is impossible to see rapid action on a carbon tax.

It's likely that we will see a national price on carbon before the next president takes office, but it won't be as part of the grand bargain over the fiscal cliff, and despite the current trends, it probably won't be a carbon tax.

– This article is a modified version of a story in Energy Trends Insider, a free subscriber-only newsletter that identifies and analyzes financial trends in the energy sector. It's published by Consumer Energy Report.