Economists Lawrence Goulder and Marc Hafstead in October published Tax Reform and Environmental Policy: Options for Recycling Revenue from a Tax on Carbon Dioxide on behalf of Resources for the Future.  The paper is available here.  The paper analyzes the effect on the U.S. economy of the adoption of a $10 per ton carbon tax starting in 2013 that increases 5 percent per year to the year 2040.  The paper considers three scenarios for using the revenue raised by the carbon tax:  (i) cash rebates to households; (ii) a reduction in personal income tax rates; and (iii) a reduction in corporate income tax rates.  However, in all scenarios, 15 percent of the revenues from the carbon tax are used to provide “tradeable exemptions” for companies in the 10 industries projected to suffer the largest reductions in profits due to the carbon tax.  Further, in none of the scenarios is an economic benefit included for the health or environmental benefits of reduced carbon emissions.

GDP in each of the scenarios is reduced by less than 1 percent per year.  In the scenario in which the revenue is used to pay cash rebates to households, GDP is reduced by .56 percent; in the scenario in which the revenue is used to reduce personal income tax rates, GDP is reduced by .33 percent; and in the scenario in which the revenue is used to reduce corporate income tax rates GDP falls by only .24 percent. 

The paper does not include a scenario in which none of the revenue is used to fund tradeable exemptions.  If instead that 15 percent of the revenue was used to fund further reductions in corporate income tax rates, it would have been interesting to see if the authors’ model projected an increase in GDP.  If it did, that would mean the nation could have clean air and a larger economy (but at the cost of not assisting the industries and households most disadvantaged by the carbon tax).

If the paper is correct, even in the least efficient scenario of using the revenue available after the cost of providing the tradeable exemptions and paying cash rebates to households, GDP is reduced by only .56 percent.  It would seem reasonable that the reduced health care costs from the reduction in carbon emissions would offset much if not all of .56 reduction in GDP.  If that supposition is correct, it would mean that clean air, tradeable exemptions for the affected industries  and cash rebates to households could all be achieved while having no adverse effect on GDP.  Unfortunately, the current Congress is far too dysfunctional to even entertain such a proposal.

For additional information with respect to the intersection of a carbon tax and income taxes, a discussion of the Congressional Budget Office’s report on a carbon tax is available in the post below, available here.