Emission control

Congress to debate carbon tax legislation developed by Tufts economist

Al Gore and Leonardo DiCaprio have helped awaken the country to global warming, but many policy makers and scholars have been thinking about the problem for decades. Among them is Gilbert Metcalf, a Tufts economist whose expertise is in tax policy and climate change. When Congress takes up a handful of bills this fall aimed at lowering America’s carbon emissions, one piece of legislation will be based on Metcalf’s work, which was funded by the Brookings Institution and the World Resources Institute.

Birds roost on the riggings of a crane near belching smokestacks near the San Diego National Wildlife Refuge in California. © NATIONAL GEOGRAPHIC/GETTY IMAGES

The two institutes were familiar with Metcalf’s research on ways to implement environmental taxes as a means of discouraging the release of carbon dioxide into the atmosphere, the most significant greenhouse gas that contributes to climate change. Because such a tax would likely be passed along to the consumer, Metcalf has also been looking at ways to ensure that no one’s overall burden would go up.

His ideas are the basis for America’s Energy Security Trust Fund Act, legislation sponsored by U.S. Rep. John B. Larson, D-Conn. Metcalf’s plan is twofold: a tax levied on the carbon content of fossil fuels and a reduction in the payroll tax.

Sizable carbon footprint
The United States produces about six billion tons of carbon dioxide every year, or about 25 percent of the world’s emissions, Metcalf said. While the United States never signed the 1997 Kyoto Protocol, a global agreement to reduce greenhouse gases by 2012, legislators and many state governments have begun working on their own to devise methods to mitigate climate change.

“Scholars in the United States have been thinking about different ways we could construct policy to discourage the emission of greenhouse gases, carbon dioxide in particular,” said Metcalf. He said there are two main approaches. One is the cap-and-trade system, in which the government would limit the aggregate amount of emissions nationwide by requiring industries that release emissions to obtain a permit. Permits would be bought and sold in the open market. However, Metcalf said, cap and trade would be difficult to administer because potentially thousands of companies would be involved in the buying and trading of permits. In addition, he said, tradable permits would be subject to large price fluctuations, whereas a carbon tax would provide certainty to firms that are concerned about controlling their costs.

Gilbert Metcalf © ALONSO NICHOLS

Taxing emissions from energy producers is more efficient, Metcalf said, because the number of producers of coal, natural gas and crude oil is relatively small, making such a program easier to administer. He has proposed an initial tax of $15 per ton of carbon dioxide produced. The tax, he said, would raise $80 billion in the first year, making it “by far the most substantial environmental tax that the United States has.”

Payback for taxpayers
But even supporters of a carbon tax fear that because those producers will pass on the cost of the tax to the consumer—meaning heating bills, for example, could go up—the poor and the middle class will bear the brunt of a new tax. In addition, simply adding a new tax is politically unpopular, even one aimed at helping the environment.

So Metcalf has gone one step further. He proposes using the $80 billion to provide every American worker with an income tax credit tied to their payroll taxes. That would make the proposed carbon tax revenue-neutral and allow the money to be distributed in such a way that the poorest benefit the most.

Under Metcalf’s plan, most households would receive an income tax credit equal to the first $560 of payroll taxes per worker. For a working-class family in which both adults work and earn $35,000 in annual household income, the tax credit would increase their after-tax income by 3.2 percent. For a family with one adult working and earning $95,000, the credit would increase this family’s after-tax income by 0.6 percent. Designing the tax credit this way, Metcalf said, ensures that a typical household in each income bracket receives as much back in credit as they pay in higher prices because of the carbon tax.

“The political reality is that one of the great fears with a carbon tax is that the government will just waste the money. By putting forward a proposal that gives the money back in a fair way, it gets around this criticism,” he said.

Metcalf said that House Speaker Nancy Pelosi, D-Calif., has promised to bring up a discussion of carbon emissions in October or November, although he expects it will be at least 2009 before some kind of climate-control legislation is passed. In addition to Larson’s bill, there are competing proposals, some of which advocate carbon emissions taxes and others that support cap-and-trade plans.

Metcalf said that more and more companies are coming out in favor of a carbon tax over a cap-and-trade plan. “Companies want some sort of federal carbon policy—whether it is a cap-and-trade system or a carbon tax,” he said. “Their view is they would prefer to face one national policy than a patchwork of state policies that differ.

“I think we’ve now got some momentum in the United States,” said Metcalf. “All the impetus and activity at the state level has gotten folks in Washington to realize that if they don’t get on this train, it will leave them behind. It’s gratifying that people are starting to pay attention to this in a serious way.”

Marjorie Howard is a senior writer in Tufts’ Office of Publications. She can be reached at marjorie.howard@tufts.edu. This story appeared in the October 2007 issue of the Tufts Journal.