This week the Congressional Budget Office (CBO) released a report, Effects of a Carbon Tax on the Economy and the Environment, which explores the economic and environmental impacts of a carbon tax.
The NAM recently released an economic study conducted by nonpartisan NERA Economic Consulting, looking at two carbon tax scenarios: one levied at $20 per ton increasing at 4 percent, and the other designed to reduce carbon dioxide (CO2) emissions by 80 percent. Our study, which was actually cited in the CBO report, found that any revenue raised by the carbon tax would be far outweighed by the negative impacts to the overall economy – even if all of the revenue was used for either reducing the federal deficit or decreasing marginal tax rates (the two less bad options according to CBO). In fact, our study showed the higher the carbon tax the more severe the impacts to the economy.
A carbon tax designed to reduce CO2 levels by 80 percent could place tens of millions of jobs at risk and raise gasoline prices by over $10 per gallon, residential electricity prices by over 40 percent, and natural gas prices by almost 600 percent. Manufacturing output could drop by as much as 15.0 percent in energy-intensive sectors and 7.7 percent in non-energy-intensive sectors. The overall impact on jobs could be substantial, with a loss of worker income equivalent to as many as 1.5 million jobs in 2013 and 21 million by 2053.
And sure, despite these economic calamities, you can raise federal revenues with a carbon tax – you can raise revenue with any tax, that’s generally the point of a tax. But as our study shows the negative impacts a carbon tax has on manufacturers, jobs and households makes it a very inefficient way to raise government revenue. With a carbon tax, a substantial portion of the amounts collected would be lost through an economic concept known as “deadweight costs” – that is, reduced economic output caused by the tax, lowers the total “pot” of taxable dollars in the economy, and thus diminishes the amount of revenue collected. The higher the carbon tax gets, the more severe impact it has on the economy, and the more tax dollars are lost to deadweight costs.
Thus, even in the “best case” scenario in which politicians resist the urge to use new carbon tax revenue on new spending programs, and all of the revenues collected are used to reduce the deficit and lower marginal tax rates, as our study shows, a poorly-crafted carbon tax can still hurt our economy.
Greg Bertelsen is director of energy and resources policy, National Association of Manufacturers.
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