U.S. Carbon Tax Swap

And here I thought I had such a neat idea, when someone else already thought of it, and did a pretty in depth analysis of it: enact a carbon tax, along with a cut in the payroll tax. The tax cut is used to counter the regressive nature of the carbon tax (the tax cut is progressive), as well as to avoid hurting economic growth. Read the paper by Tufts economist Gilbert Metcalf here.

Fuel Tax Offset by Tax Cuts

It looks like all the remaining presidential contenders favor a cap-and-trade system for limiting CO2 emissions. This is about good politics, not good policy, as most economists seem to agree that a carbon tax is the way to go. I don't like tax increases, but was thinking that a carbon tax could be good if it a) was set at the "right" amount, and b) was imposed along with a cut in income taxes, so it would be a "wash" for the typical tax payer. The carbon tax would encourage the conservation of finite resources and development of other, non-carbon energy sources, and a lower income tax would be good for economic growth. The "right" amount, which would equal the economic damage done by a ton of CO2, is likely around $14 per ton, according to Bjorn Lomborg and the IPCC report. This would be equivalent to an increase of 14 cents per gallon of gasoline.

Well it looks like Canada is going this route come July. The 2.4 cents per liter of gas actually seems a bit low, and the 7.2 cents in 2012 seems high, but they seem to be in the right ballpark. I do wonder how they came up with the amount of the tax cut. Have they considered how higher energy costs may drive up the costs of some products, and be passed on to the consumer?