The Carbon Tax, the Deficit, and Your Bank Account

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coal-burning power plantsThroughout history, taxes have been one way for governments to try and influence the behavior of their citizens economically. So-called "sin taxes," for instance, are levied on products like alcohol and tobacco, the idea being to curb their usage by making them more expensive.

Democratic Rep. Jim McDermott of Washington state has just introduced a tax bill into the House of Representatives that would attempt to do something similar. But in this case the sin is emitting carbon dioxide, and it's most likely consumers who are going to have to do the penance -- in the form of higher prices on just about everything.

Democrat Rep. Jim McDermottWhat Goes Up Must Come Down

The bill is called The Managed Carbon Price Act of 2012, and would levy a carbon tax that would make the production of carbon emissions more expensive and therefore reduce them.

Man-made carbon emissions are one of the primary causes of global climate change. Whenever fossil fuels are burned, carbon dioxide is given off. Familiar examples of carbon emitters are coal-burning power plants, natural-gas furnaces, and gas-burning automobiles.

Under MCP Act, the Treasury would issue federal emission permits that would be purchased by large-scale emitters, like power plants or any kind of heavy-manufacturing facility. Each permit would be valid for five years. Emitters would buy permits according to how much carbon they emit. Those that chose to take action to reduce their emissions will then save money because they'll need to purchase fewer permits.

Who Pays the Piper?

Some countries cut out the middleman and go directly to the consumer, by levying carbon taxes right at the gas pump, for example. But however it's done, the idea of a carbon tax isn't new. Even McDermott's bill is an updated version of similar legislation he introduced in 2009.

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But even if it's not a direct consumer tax, the MCP Act is going to cost money, and it's very likely some of the costs will make their way down to the consumer level. Take steel. To make steel, you need heat. To make heat, you typically burn fossil fuels. If the proposed carbon permits cause the manufacturing costs of steel to go up, steel manufacturers will likely raise their prices.

Steel goes into cars, appliances, tools, and a host of other consumer products. So as the price of steel rises, the cost of many of the things you buy will likely go up, too. And that coal-burning power plant you depend on for your electricity? It, too, will have to buy carbon permits. Again, at least some of that cost will likely be passed on to you in the form of higher rates.

The Sunny Side of a Carbon Tax

McDermott's bill calls for part of the collected revenue to go toward reducing the federal deficit, with the rest to be passed back to consumers in the form of dividends. His belief is that these dividends would offset any increased costs at the consumer level.

That may or may not happen. It's estimated that the MCP Act would generate hundreds of billions of dollars' worth of tax revenue over the next several decades. But with government programs of this size, it's hard to make long term financial projections with a great deal of accuracy.

But dividend or not, it is neither thoughtful nor practical for us to charge blithely down the fossil-fueled path the world is on, pretending that all is well. If you believe in the power of the free market (albeit one with slight regulatory nudging), then McDermott's plan is a reasonable way to fight climate change.

A carbon tax even has the support of the conservative American Enterprise Institute and Mitt Romney's economic adviser. And according to Rep. McDermott, ExxonMobil (XOM) supports a carbon tax, as well. What are the chances of all that? As such, it might be best to make hay with this idea while the sun shines. So far at least, there's no permit required for a man using his pitchfork.


John Grgurich is a regular contributor to The Motley Fool, and owns no shares of ExxonMobil. The Motley Fool owns shares of ExxonMobil.

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