Instituting a carbon tax could help reduce the deficit and “produce incremental benefits” for the environment, but could also raise the cost of many goods and services, the nonpartisan Congressional Budget Office said in a report Wednesday.
The report outlines the potential consequences of a policy that has become a third-rail issue for many politicians in both parties, despite its potential to raise government revenue at a time of tight budgets.
Though President Barack Obama has said he wants to cut the emissions of carbon dioxide and other greenhouse gases linked to climate change, the White House has said it would “never” propose taxing them. Mr. Obama has acknowledged that policies to cut emissions raise concerns among Democrats in districts that are heavily reliant on old power plants that run on carbon-emitting fuels like coal.
Republicans, meanwhile, stand poised to bash any hint at such a tax, and gave a carbon tax bill from Sen. Barbara Boxer (D., Calif.) a cool reception in February.
The CBO report was requested by Rep. Henry Waxman of California, the top Democrat on the House Energy and Commerce Committee. It offers an assessment of potential costs and benefits but doesn’t draw conclusions about the net effect the policy would have on the economy.
The report says the tax would raise the cost of fossil fuels, which “would tend to increase the cost of producing goods and services—especially things, such as electricity or transportation, that involve relatively large amounts” of carbon emissions.
But it also says a carbon tax would encourage Americans to use less carbon-intensive goods and services, which could slow the pace of climate change.
CBO says a carbon tax would hit low-income households harder by raising their energy bills, but the economy as a whole would benefit if the tax was used to reduce the deficit. In general, lower government deficits translate to higher economic growth in the long run, the report said.
A previous CBO report in 2011 found that a $20 per ton carbon tax would raise nearly $1.2 trillion over the next decade.
The CBO said the environmental benefits of a carbon tax could be significant if the tax helped avoid catastrophic consequences of higher global temperatures, but also said it’s difficult to pin down the likelihood that the effects of global warming would be catastrophic.
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