July 17, 2007

Adventures in Carbon Taxation

According to this short paper by Gilbert Metcalf (via Grist), it would be fairly easy to combine a carbon tax with a reduction in payroll taxes. The result, Metcalf says, would be "revenue-neutral and distributionally neutral." In other words, so much for the increasingly common conservative line that the United States shouldn't do anything about global warming because it would hurt the poor.

On the other hand, Metcalf's clever proposal wouldn't do anything for retirees, who don't pay any payroll taxes, so that probably needs tweaking. Also, it's possible that using carbon taxes to fund Social Security would put the program on an unstable footing--since, if the carbon tax works, it will generate less and less revenue over time, as people use less and less carbon. Metcalf argues that Congress could just hoist the payroll tax back up when that happens. True, but that's easier said than done.

Meanwhile, some people have suggested that a carbon tax will just force heavily-polluting industries to outsource their production abroad. I think the technical term for this is "carbon leakage." Meltcalf writes that this fear "may be overblown," and cites a 2003 paper by Matthew Kahn, which, unfortunately, isn't online. In any case, the vast majority of carbon emissions in the United States come from the transportation, residential, and commercial sectors, and those things can't exactly be outsourced.
-- Brad Plumer 7:11 PM || ||