While President Barack Obama presented a myriad of new proposals to combat climate change in his new Climate Action Plan (PDF), one of the most striking aspects of the plan is that it does not contain any proposal for a carbon tax, which many experts consider the "missing link" in the president's new plan.
The basic idea behind putting a tax on carbon is that it would create a market incentive to develop low or zero carbon emission energy sources and simultaneously create a market disincentive to using carbon emitting energy sources. The market-based approach of the carbon tax explains why so many economists, from Joesph Stigliz on the left to Gregory Mankiw on the right, believe the carbon tax is the most efficient and least intrusive mechanism for dealing with emissions.
Reinforcing the case for the carbon tax just days before the release of Obama's climate plan, a new exhaustive study by the National Research Council (NRC) found that a carbon tax "will be both necessary" and a "more efficient" way to substantially reduce greenhouse gas emissions, especially compared to current energy tax policies. This conclusion is based on the NRC's economic analysis of how each provision of the tax code affects carbon emissions, which found that overall the $48 billion in energy-sector tax expenditures by the federal government between 2011 and 2012 do not necessarily decrease emissions at all. Compounding this, the report found that even the most effective tax expenditures in terms of reducing carbon emissions, resulted in "very little if any" reductions and came at a "substantial cost."
In contrast with tax expenditures which lose revenue, a carbon tax has the major advantage of generating revenue. For example, a recent Congressional Budget Office (CBO) report notes that a carbon tax that starts off at $20 per ton and then rises by 5.6 percent annually could raise as much as $1.2 trillion over ten years, while at the same time reducing carbon emissions by 8 percent over the same ten years. Such revenue could be extremely beneficial if it was used to reduce the deficit, fund critical public investments, and/or to provide financial relief to middle- and low-income families. This revenue should not however be plowed into tax breaks for corporations and the wealthy, while leaving everyone else worse off, as some groups are proposing.
Though a carbon tax may be politically difficult on the federal level in the short-term, the tax is getting some attention at the state level. For example, the state of California already adopted a carbon tax of sorts in 2013, with the implementation of it's cap-and-trade program, which raised $256 million in revenue so far this year. In addition, environmentalists are pushing for a ballot measure in Massachusetts that would create a small statewide carbon tax.
Although they do not like to admit it, even opponents of the carbon tax acknowledge that it may become politically viable as climate and budgetary pressures continue to mount and policymakers are faced with an increasingly unpopular set of alternatives.