Climate Change Legislation and Revenue Recycling

On September 16, Clean Air-Cool Planet and the Environmental and Energy Study Institute (EESI) hosted a policy discussion to explore how revenues generated through potential climate change legislation can be recycled through the tax code to lower the overall societal cost of reducing greenhouse gas emissions.

• A cap-and-trade system provides more certainty of emission cuts but also inefficiencies and price volatility. A carbon tax would be a known cost and could be adjusted to meet environmental needs.
• A carbon tax is administratively simple, efficient, straightforward and is viewed by the public as more transparent than a cap-and-trade system.
• If a cap-and-trade system is implemented, auctioning the permits (as opposed to free distribution) would provide economic, fiscal, and equity advantages.
• Recycling the tax or auction revenues could add $1 trillion to the GDP by 2030. The revenues could be reinvested as research and development in clean energy technologies, used to pay down the federal deficit, and/or returned to the public.
• A cut in payroll taxes would be a more economically efficient way to allocate revenue to the public, but a lump-sum rebate would be more beneficial to lower income households (many of which are elderly and/or do not work). Although raising energy prices is regressive, the ultimate impact could be either regressive or progressive depending on how revenue is recycled.
• Politically it is difficult to implement a carbon tax since people have a difficult time seeing a short term reward and do not always understand the environmental benefits.