Presidential candidate and Senator Chris Dodd (D-CT) announced his support this week for a tax on carbon emissions as a way to reduce global warming. Other candidates have avoided any talk of raising taxes as a way to combat CO2 emissions and most have avoided talk of tax increases altogether. But even conservative economists have been publicly promoting the carbon tax for some time now.
While most Democrats in Congress have been considering several "cap-and-trade" programs that would limit the overall amount of CO2 emissions and allow companies to trade rights to pollute amongst themselves, several economists and even business leaders have lately argued that a carbon tax would be less burdensome. Part of the reason is the great bureaucracy required to measure emissions from individual plants under a cap-and-trade system. Another reason is that a carbon tax would create more certainty about how much it costs to pollute.
Some environmental groups, however, worry that a carbon tax sets no overall limit on pollution the way a cap-and-trade system would. The challenge for proponents of the carbon tax is to design it in a progressive way. Otherwise, it would be passed onto consumers and therefore act much like a consumption tax, which is always regressive. Working families probably don't use less gasoline than rich families, but if they pay the same carbon taxes (indirectly) that means the carbon tax will take a greater percentage of a working family's income. A progressive version might have to somehow target offsetting tax cuts towards those hardest hit by the carbon tax.