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MIT study suggests carbon tax could help reduce US deficit, lower other taxes, reduce emissions

A new report from MIT’s Joint Program on the Science and Policy of Global Change suggests that a tax on carbon emissions could help raise the money needed to reduce the US deficit, while improving the economy, lowering other taxes and reducing emissions.

In the report—Carbon Tax Revenue and the Budget Deficit: A Win-Win-Win Solution?—John Reilly, co-director of the Joint Program and co-author Sebastian Rausch, now at ETH Zurich University, calculated the impact a carbon tax starting at $20 per ton would have using a national economic model that details energy, taxes and household incomes. They found that the tax would raise $1.5 trillion in revenue, which could then be used to reduce personal or corporate income taxes, extend the payroll tax cut that expires this year, maintain spending on social programs—or some combination of these options—while reducing the deficit.

Bush-era tax cuts are scheduled to expire at the end of 2012, leading to interest in raising revenue through a carbon tax. This revenue could be used to either cut other taxes or to avoid cuts in Federal programs. There is a body of economic research suggesting that such an arrangement could be a win- win-win situation. The first win—Congress could reduce personal or corporate income tax rates, extend the payroll tax cut, maintain spending on social programs, or some combination of these options. The second win—these cuts in income taxes would spur the economy, encouraging more private spending and hence more employment and investment. The third win—carbon dioxide (CO2) pollution and oil imports would be reduced.

—Rausch and Reilly (2012)

The analysis used the MIT US Regional Energy Policy (USREP) model to evaluate the effect of a carbon tax as part of a Federal budget deal. Reilly and Rausch compared a baseline scenario—in which temporary payroll cuts and the Bush tax cuts are allowed to expire—to several scenarios that include a carbon tax starting at $20 per ton in 2013 and rising at 4%.

They found that whether revenue is used to cut taxes or to maintain spending for social programs, the economy is better off with the carbon tax than if taxes remain high to maintain Federal revenue. They also found that, in addition to economic benefits, a carbon tax reduces carbon dioxide emissions to 14% below 2006 levels by 2020, and 20% below by 2050.

Oil imports remain at about today’s level, and compared to the case with no carbon tax, are 10 million barrels per day less in 2050. The carbon tax would shift the market toward renewables and other low carbon options, and make the purchase of more fuel-efficient vehicles more economically desirable.

In shifting the market through a tax on emissions rather than through tax credits for renewable sources, the nation would be raising revenue rather than spending it. This contributes to the win-win-win result we expected for the nation’s economy and environment.

—John Reilly

Some have expressed concern over the impact a carbon tax could have on lower- and middle-income households. The study shows that this actually depends on how the revenue from the tax is used. If the revenue is used to maintain social programs, lower-income households, not surprisingly, benefit. In the short term, this also would benefit the economy, as these households have the greatest propensity to spend. Conversely, cutting income taxes would benefit wealthy households because they pay more in taxes. The analysis found that extending the payroll tax cut would be the most neutral option because there is an income limit, leveling out the affect across the spectrum.

There authors note a few caveats to the generally positive results around assumption in the model. The researchers also warn that while in principle it is possible to get very positive results from a carbon tax, in practice their study shows the result would depend entirely on the specific proposal—of which there are several. Earlier this month, Congressman Jim McDermott (D-Wash.) introduced one measure similar to a proposal by his Senate colleagues Maria Cantwell (D-Wash.) and Susan Collins (R-Maine). House Ways and Means Committee member Pete Stark has also introduced a bill that has 18 co-sponsors.

The level of congressional activity compliments growing bipartisan support off Capitol Hill. Former Republican Congressmen Sherwood Boehlert from New York and Wayne Gilchrest from Maryland joined Congressional Democrats Henry Waxman (Calif.) and Ed Markey (Mass.) in support of a carbon tax in a February opinion piece in The Washington Post. Meanwhile, former Republican Congressman Bob Inglis (SC) launched a think tank this summer to promote the tax and the conservative American Enterprise Institute held an informal forum on the subject in July.

The country faces difficult tradeoffs in getting the Federal budget deficit under control. In our analysis of a carbon tax, we find a win-win-win situation that requires no tradeoff at all. Carbon tax revenue allows (1) cuts in other taxes, (2) benefits the economy, and (3) reduces CO2 emissions and oil imports. The tradeoffs are mainly whether we want to choose a set of measures that produce higher consumption in the near term, or a path that sacrifices some current consumption for an investment tax credit that leads to greater benefit in later years. Given current economic conditions, changes that have more immediate benefit may be preferable, but we can hope for a compromise that yields a result that is also beneficial for the country in the longer term.

—Rausch and Reilly (2012)




Why do we need to cut man made carbon dioxide emissions? The USA has met the 2012 Kyoto endgame man made targets already, even though on NET, North (and South) America emit no net CO2. Meeting the man made Kyoto targets merely provided a little extra margin above the NET Hemispheric Carbon dioxide annual flux.

Besides if you give the politicians more tax money, what makes you think they won't just spend it? Do you really believe they would cut taxes elsewhere?

If so I have a bridge for sale to a Borough of New York you might be interested in acquiring...


It is well known by the majority that those easy to apply measures would help to solve 3 to 5 major current problems affecting USA's economy and environment. The same majority also know that it will not be done because the 3% with most of the wealth will block it.

Roger Pham

<<"Why do we need to cut CO2 emission?"

Because of climate change and global warming problem, which has been worsening rapidly. US grain export this year will be tremendously affected, which will further lead to higher trade deficit and further loss of tax revenues. Dairy, livestocks, poultry, and processed food industries as well as grain to ethanol industry will also be affected. This will further exacerbating the unemployment crisis.

By contrast, a carbon tax that is also aiming at putting tariff on imports from countries that use a lot of coal-fired energy in the manufacturing process will also reduce the US trade deficit and help domestic manufacturers and create more jobs.

Furthermore, a carbon tax will spur the growth of the renewable energy industry and infrastructure, and this will be the greatest and most long-lasting job creator of all. Decent-paying local jobs that can't be outsourced upon the installation and maintenance of local solar roof-top collectors and wind turbines. Someone will have to clean the roof-top solar PV panels once in a while, and this will create a lot of non-skilled jobs that are increasingly scarce in the days of high-tech manufacturing and automation and computerization. When youth unemployment is reduced, so will local crimes and social degradation will be reduced.


I can hear the Teabaggers already. "What is this guy some sort of Communist?"

Roger Pham

This is how the Teabaggers can be appeased:

The carbon tax can be implemented to resemble more of a threat than actual revenue. The carbon tax can be announced in advance, and will be very gradual so as to allow people to change their buying decisions toward more energy-efficient cars, home lighting, and appliances and weather-proof their houses. The gradual phasing in of carbon tax will also spur tremendous investments in renewable energy and developments, such that when the carbon tax will be in full effect, people will have already taken steps to shelter themselves from the carbon tax. Job growth from development in renewable energy industry and energy efficiency industry will increase income tax revenues far more than any carbon tax that will be collected.

This is kinda like when a child misbehave, you will just have to raise the whip to enforce behaviour, without having to actually spank the child!

Roger Pham

I must hasten to add that at the moment and in the immediate future, wind and solar electricity are at or nearing cost parity with fossil-fuel electricity. The only thing that will be needed is a tie-breaker to overcome the inertia and the risk aversion to investment. Just the announcement of a gradually phasing in carbon tax will be all that is needed to prompt massive investments in renewable energy. There are a lot of rich folks with a lot money buring holes in their pocket book waiting for a chance for investment into something worthwhile and long-lasting besides high-risk retails, housing, or venture capital. All these investments will create an economic boom not unlike previous booms in PC's and Cell Phones etc..

Kit P

MIT needs to high some people with a little common sense to go around and ask all the MIT genius, what are you stupid?

The first problem with taxing energy is that it is not an important share of a families income. Increase their energy bill $20 and they conserve by eating expensive restaurants.

The second is that making energy more expensive just send jobs to places that burn more coal less efficiently like India and China.


Very well said Roger but how can you deliver this common sense message to people with the eyes and ears wide shut for 101 reasons.

A new economy or new deal could certainly rise from a concerted national effort to switch to a cleaner economy and environment.

The R and Tea Party will certainly not do it.


Higher taxes that impact the middle class help because the gov could then dole out the money (or what's left after it goes through the layers of gov) to whatever political advantage their might be?

Get serious. Can I say that buying Hummers COULD be a win-win-win?

1. Auto workers make more money
2. Drives up gas prices (so more HEVs)
3. Leaves less money to buy hamburgers.

They actually say (no idea if they actually believe) it COULD help raise the money needed to reduce the US deficit, while improving the economy, lowering other taxes and reducing emissions.

And of course it COULD (more likely) help us catch up with Greece, Spain and Cuba.

In actuality, time for these idiotic childish ideas is running out;

“A simple graph from the U.S. Energy Information Administration shocked even the most astute energy wonks. Over the previous few months, the use of natural gas in power plants had risen so quickly that it accounted for as much electricity as coal, a far dirtier fossil fuel. (As usual, renewables such as wind and solar power flatlined near the bottom of the chart.)”

"Cheap natural gas has taken a big bite out of coal very quickly,". "And there's going to be a bloodbath in wind power as well. . . And as for hoping to make . . . wind and solar power, cost-competitive with fossil fuels . . . grid parity has suddenly gotten much tougher. Arguably, it's impossible to reach with existing technologies. (David Victor, energy expert at UC, San Diego).

The United States is saving about 400 million metric tons of carbon emissions annually in the recent switch to natural gas from coal. That's roughly twice as much progress as the European Union has made in complying with the Kyoto Protocol through policy efforts.
David Rotman . . Tuesday, August 21, 2012.

technology review Published by MIT

Associated Press IMPACT: CO2 emissions in US drop to 20-year low. By KEVIN BEGOS | Associated Press – Fri, Aug 17, 2012

The amount of carbon dioxide being released into the atmosphere in the U.S. has fallen dramatically to its lowest level in 20 years, and government officials say the biggest reason is that cheap and plentiful natural gas has led many power plant operators to switch from dirtier-burning coal.

Many of the world's leading climate scientists didn't see the drop coming, in large part because it happened as a result of market forces rather than direct government action against carbon dioxide, a greenhouse gas that traps heat in the atmosphere and it demonstrates that "ultimately people follow their wallets" on global warming.

"There's a very clear lesson here. What it shows is that if you make a cleaner energy source cheaper, you will displace dirtier sources," said Roger Pielke Jr., a climate expert at the University of Colorado.
Wind supplied less than 3 percent of the nation's electricity in 2011 according to EIA data, and solar power was far less. Estimates for this year suggest that coal will account for about 37 percent of the nation's electricity, natural gas 30 percent, and nuclear about 19 percent.

"Installation of new renewable energy facilities has now all but dried up, unable to compete on a grid now flooded with a low-cost, high-energy fuel,".


Roger Pham

"Installation of new renewable energy facilities has now all but dried up, unable to compete on a grid now flooded with a low-cost, high-energy fuel,".

Thank you, ToppaTom for posting this statistic. This is the more reason that a carbon tax will be needed. With increase in heat retention by the atmosphere, future summers will be more and more intolerable. Most people would rather to pay a little more for energy in order to have more jobs available and to halt increasing global warming. Our present course will lead to the creation of hell on earth, on every sense of the word, arriving every summers, and it will be too late to repent. The CO2 emitted now will stay around for thousands of years!


Kit P,

Article mentions the introduction tax on imported good as well in dependance of carbon emissions. Could be more tax colected than domesticaly.


If the CO2 emitted now will stay around for thousands of years then almost any amount of CO2 emitted, over each decade would build and build.

Hysterical beliefs are driving illogical behavior.

Any science suffuciently advanced . . .


(Reuters) - "Germany's energy strategy will cost consumers dearly as costs for new renewable power generation units and networks must be passed on, the head of the German unit of Swedish state-owned energy group Vattenfall was quoted saying on Monday.

The comment came a day before Chancellor Angela Merkel is to meet with industry, unions and social causes lobbyists on run-away power prices, which already need reining in much more immediately.

'In the next 10 years some investments totaling 150 billion euros ($187.8 billion) will be necessary,' Vattenfall Europe chief Tuomo Hatakka told the Sueddeutsche Zeitung. 'I assume that the bill for private customers will rise by up to 30 percent to 2020.'

He also said the planned shift away from nuclear and fossil fuels towards green energy derived from wind and solar would take longer than expected, citing delays to important projects such as connections to offshore wind parks.

German consumers must pay rising subsidies for renewables which are paid above market rates under the law.

Germany already has the second-highest power prices in Europe.
GreenCarCongress sidebar http://t.co/NTiTN7T9

Roger Pham

Germany is a rich country. They can afford it, especially when it means more jobs for their people. The drive of Germany is toward Green jobs. When the rest of the world's economies are sputtering, Germany's economy is still standing stall. Job opportunities are more important than cheap energy! Youth unemployment is very dangerous because it will make the youths susceptible to recruitment by crime gangs and hate groups. This was what led to WWII that was preceded by a devastated German economy in which youths was susceptible to the recruitment of hate group eagerly looking for scapegoat. This is what happening now in many parts of the world when organized youths demonstrated against their government and overthrew many governments, where there does not exist a convenient racial minority to use as scapegoat.


A carbon tax would help the USA balance its budget and balance of payments.

If you added a dollar (say) to a gallon of gasoline, people would respond by using less of it - and the government would get the money (which they need).

The question is how to bring it in:

If you bring it in slowly (say over 10 years) - enough time for people to get ready for it, is should cause less pain, but it is likely to be diluted or axed by politicians.

If you bring it in suddenly, you cause more pain (in the short term), but you get it done, and the shock factor might produce results.

All people need to do is drive more economical cars - these are readily available and are already in use in Europe and Japan where fuel is already about $8 / US gallon.

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