The Price Is Right

Carbon Pricing Would Cut the Deficit and Create Jobs

Cutting dangerous carbon pollution would cut the national deficit, create jobs, and save social programs, all while fighting climate change, write Susan Lyon and Jorge Madrid.

Piles of coal are shown at NRG Energy's W.A. Parish Electric Generating Station, March 16, 2011, in Thompsons, Texas. Putting a price on carbon could generate revenues that we could use to lower the deficit. (AP)
Piles of coal are shown at NRG Energy's W.A. Parish Electric Generating Station, March 16, 2011, in Thompsons, Texas. Putting a price on carbon could generate revenues that we could use to lower the deficit. (AP)

We should put all of our options on the table at a time when job creation and deficit reduction is the name of the game and raising revenues is a political quagmire. A price on carbon is one of these options. It could raise upward of $846 billion over a 10-year period, according to the nonpartisan Congressional Budget Office. It’s no magic bullet for our nation’s deficit issues but it is certainly a practical way to raise revenues while also creating jobs, fighting climate change, and saving programs for struggling communities. And it enjoys support from across the political spectrum.

Here we examine how carbon pricing would work and why it’s a good proposal.

Further deficit reduction should include new revenues and smart cuts

The debt deal compromise reached between Congress and President Barack Obama will cut federal discretionary spending by about $1 trillion over the next 10 years, with the so-called “super committee” accountable for another $1.2 trillion in deficit reduction proposals by Thanksgiving. The secondary round of deficit reduction measures can be achieved by further spending cuts or through revenue-raising strategies.

Republican leadership has made clear they have no intention of raising additional revenue even when it comes to closing tax loopholes that primarily benefit the wealthy or ending tax breaks that go to the richest 2 percent of Americans. Likewise, present tax giveaways to some of the most profitable industries in the country, like Big Oil, are also off the table even though the tax-subsidized industry racked in a massive $35.1 billion in profits in the second quarter of 2011 alone.

We also know that the first wave of cuts was made on the backs of low-income Americans. The cuts will place restrictions on our annual spending bills that could impact investments to programs that fund education and training dollars, as well as funding for employment programs, housing assistance, heating and cooling assistance to low-income seniors, and child care services that allow mothers to enter the workforce. Cutting more funding to programs that help low-income and working-class Americans will cause even greater pain.

Likewise, a cut-only strategy could be absolutely devastating for our jobs crisis. Today, 25 million Americans are in need of a full-time job, with unemployment still above 9 percent and nearly twice that rate for African Americans and 11.3 percent for Latinos. If less people are working, less people are spending, and economic recovery will be slow and anemic at best.

According to the Economic Policy Institute, the combined effect of the deal’s spending cuts and allowing unemployment benefits and the payroll tax holiday to expire would cost the U.S. economy 1.8 million jobs through 2012 alone. It will also likely exacerbate poverty as unemployment benefits kept 3.3 million people out of poverty in 2009.

The upshot: To grow and stabilize our economy, we need a balanced plan that includes new revenue sources along with smart cuts.

How a price on carbon would reduce the budget deficit

A cap-and-trade system that puts a price on carbon would reduce the budget deficit by generating revenues from carbon polluters. Here’s how it would work.

First, the government would create carbon allowances, or “emissions permits,” and distribute them to large-scale polluting companies either by auction or allocation at varying levels. The emitting company would then effectively purchase an allowance for every ton of carbon dioxide it emits. The large revenue stream generated by all these payments collectively can then be directed back to consumers in the form of rebates, be used for deficit reduction, and be invested in clean energy.

The various cap-and-trade proposals put on the table in the past few years have proposed varying balances of these three uses of revenue. The Congressional Budget Office scores for three recent cap-and-trade bills—Waxman-Markey, Kerry-Boxer, and Kerry-Lieberman—are all similar: Enough revenues would be generated to dramatically cut the national deficit:

  • American Clean Energy and Security Act of 2009 (Waxman-Markey):
    • Would increase federal revenues by $846 billion over the 2010-2019 period
  • Clean Energy Jobs and American Power Act of 2009 (Kerry-Boxer):
    • Would increase federal revenues by $854 billion over the 2010-2019 period
  • American Power Act of 2010 (Kerry-Lieberman):
    • Would increase federal revenues by about $751 billion over the 2011-2020 period

A “cap-and-dividend” approach to pricing carbon, in which carbon allowances are auctioned off and then all or most auction revenues are returned to American households, has also been proposed. Most notable was the cap-and-dividend system proposed by Sens. Maria Cantwell (D-WA) and Susan Collins (R-ME) in the 2010 CLEAR Act. CBO never scored the system but it had projected revenues between $42 billion and $126 billion with three-fourths of this going back to consumers as rebates.

This proposal would not include significant deficit-reduction revenues, however, and it was also criticized for its relatively weak cap on carbon.

The numbers differ depending upon the total carbon cap set and how revenues are redirected. But the story is simple: Pricing carbon pays off when it comes to the national deficit.

A broad range of thought leaders supports this strategy

These ideas aren’t new, and they are historically not highly partisan as current conservative leaders would have you believe. In fact, the three most recent Republican presidents—Ronald Reagan, George H. W. Bush, and George W. Bush—all promoted use of a cap-and-trade mechanism for efficiently lowering dangerous pollution. They employed such systems to phase out lead in gasoline, cut chlorofluorocarbons and other ozone-depleting chemicals, and reduce sulfur pollution from power plants responsible for acid rain—all without undue cost.

Experts agree on the idea as well. Earlier this year the Peter G. Peterson Foundation funded six national think tanks from a broad range of the political spectrum to put forward plans addressing our nation’s fiscal challenges. Nearly every group participating specifies a price on carbon as an efficient vehicle for raising revenues in their budget plan.

Joe Romm of Climate Progress notes of these proposals:

All in all, this strikes me as a big deal. Just a few months ago, the political acceptability of any carbon pricing was viewed as virtually non-existent, a “third rail” for the foreseeable future. Now you have major policy groups from across the political spectrum seriously entertaining not just any carbon pricing, but a high and rising price sufficient to substantially reduce US emissions and put us on the path needed to meet our obligation as part of an overall global deal.

The Center for American Progress plan, “Budgeting for Growth and Prosperity,” brings the deficit below 2 percent of gross domestic product within six years and fully balances the budget by 2030. The CAP budget institutes an aggressive price on carbon, as well as an oil import fee, and achieves the CO2 reduction targets from the 2009 House climate and clean energy jobs bill (Waxman-Markey): a 42 percent cut (from 2005 levels) by 2030 and an 83 percent cut by 2050.

Of course, advocates will point out that any price on carbon could adversely affect low-income Americans, who pay a larger portion of their incomes for energy costs. But smart policy can mitigate these effects. In the CAP plan, for example, lower-income groups are protected from the impact of higher energy prices through rebates and tax reform.

Putting a price on carbon also would create jobs and stimulate new demand for American goods and services

Setting a price on carbon would accelerate America’s economic recovery while also creating clean energy jobs, spurring technological innovation, and fighting climate change. It is one key step to reach the broader goal of catalyzing the transformation to an efficient and sustainable low-carbon economy.

In reducing the deficit, we need to think about the health of our entire economic system. With staggering unemployment, the focus of any deal needs to be on job growth and the future of the American middle class.

A price on carbon would spur job creation in emerging sectors and industries from clean-tech manufacturing to R&D centers around the country. A Berkeley-Yale analysis of the Senate’s American Clean Energy and Security Act (Waxman-Markey), a comprehensive clean energy and climate bill with a cap-and-trade pricing system, estimated net job creation from a price on carbon included in the bill at 918,000 to 1.1 million jobs. CAP and the Political Economy Research Institute found job creation potential of 1.7 million jobs from the Waxman-Markey bill, which also contained a carbon pricing system.

Further, the clean energy jobs resulting from the innovation and investment that are spurred by a price on carbon are good, well-paying jobs. A recent Brookings analysis found that median wages in the jobs sectors defined as part of the “clean economy” are currently 13 percent higher than median U.S. wages.

CAP also has long argued that putting a price on carbon is essential to shaping an efficient and sustainable solution to the climate crisis. Of course, a domestic price on carbon alone is not enough to avert climate catastrophe on a global scale—nor is it enough to bring the clean energy economy to full scale. A price on carbon and clean energy investments must go hand in hand. But it would play the critical role of spurring new markets and jobs at a moment when Americans desperately need them.

In addition to generating revenues from major polluters, a price on carbon will also offer a price signal to markets that we want less carbon and more clean energy. It turns the negative environmental effects of carbon emissions into a real business cost for emitters, thus correcting a major market failure.

A cap on emissions sets a clear goal and establishes a long-term signal in the market, encouraging innovation and allowing businesses to plan their investment strategies. Put simply, pollution limits are essential for clean energy investments to spur new, low-carbon technologies of the future.

Even in the current political debate, pricing carbon pollution would be a win-win solution: It would cut the deficit, save programs for struggling Americans, spur economic recovery, and create clean energy jobs while also fostering long-term climate stability and economic prosperity.

Susan Lyon is Special Assistant for Energy Policy and Jorge Madrid is a Research Associate at American Progress.

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Jorge Madrid

Research Associate & Policy Analyst