Policymakers who are serious about addressing the nation’s long-term fiscal problems should look closely at the merits of “putting a price on carbon.” A carbon tax or similar policy is a “two-fer” that would give businesses and households a better price signal to guide their decisions about energy use, and that would raise revenue to reduce the budget deficit.
As our backgrounder on policies to reduce greenhouse gas emissions points out, market-based approaches to controlling pollution from fossil-based energy create incentives for businesses and households to conserve energy, improve energy efficiency, and adopt clean-energy technologies — without prescribing the precise actions they should take. It’s the solution that most economists prefer, including advisers to prominent members of both parties. A carbon tax or other market-based approach to putting a price on carbon can generate revenue to reduce long-term budget deficits. By itself, however, it is a regressive policy, since low-income households spend a larger share of their income on energy and energy-related products than better-off households. To protect the truly disadvantaged — a key principle that the Bowles-Simpson deficit commission set forth — any comprehensive deficit-reduction package that puts a price on carbon should include appropriate protections for low-income consumers.