

Editor's Note: The Miller Center at the University of Virginia has undertaken a "First Year Project" examining the history of presidential first years and the policy options available to Barack Obama's successor in theirs. Excerpted below is an article by the Brookings Institution's William Gale on the next president's opportunity to enact a carbon tax. The Miller Center will publish the full version of the piece on its website on Feb. 24.

Ronald Reagan, Bill Clinton and George W. Bush all achieved significant tax reform in their first years. While a president may ultimately have more than one bite at the tax apple, it is clear that a new chief executive gets a pretty big bite in the first year.

Perhaps the greatest two determinants of what and how much a president can accomplish are the party composition of each house of Congress and whether the president chooses to make tax reform a priority, particularly during the campaign. But regardless of party – and even of the makeup of Congress – the next president has an opportunity to do something truly dramatic: implement a carbon tax.

While this seems counterintuitive, given that most Republican candidates have not shown interest in the greenhouse gas policies often associated with a carbon tax, doing so makes good economic and political sense and has the support of a great number of economists, both liberal and conservative. A carbon tax would charge for carbon pollution, thus raising revenue and allowing for a combination of long-term debt reduction and cuts to taxes on personal income and corporate profits.

The discovery and exploitation of natural resources by humans gave rise to the advanced civilization in which we live today. Coal, petroleum and natural gas fueled industrialization, raising living standards and life expectancy for most. Energy use continues to fuel economic growth and development today. But along with the benefits of energy consumption come substantial societal costs – including those associated with air and water pollution, road congestion and climate change. Many of these costs are not directly borne by the businesses and individuals that use fossil fuels, and are thus ignored when energy production and consumption choices are made. As a result, there is too much consumption and production of fossil fuels.

Greenhouse gas emissions create a series of problems for the economy and the environment. The Intergovernmental Panel on Climate Change said that emissions, if left unchecked, would increase "the likelihood of severe, pervasive, and irreversible impacts for people and ecosystems."

Economists have long recommended specific taxes on fossil-fuel energy sources as a way to address these problems. The basic rationale for a carbon tax is that it makes good economic sense: Unlike most taxes, carbon taxation can correct a market failure and make the economy more efficient. "Among economists, the issue is largely a no-brainer ," wrote former Bush economic adviser Greg Mankiw in 2013.

To be clear, a "carbon tax" should address all greenhouse emissions to the extent that they are attributable to an identifiable party. Carbon dioxide accounts for the vast share of emissions in the United States, but other emissions of other gases – for example, methane and nitrous oxide – are more potent and would need to be taxed under separate schedules.

Carbon taxes would contribute to a cleaner, healthier environment and better environmental and energy policy by providing price signals to those who pollute. A Tufts University study estimates that a $15 per ton tax on CO 2 emissions that rises over time would reduce greenhouse gas emissions by 14 percent, while a study by the National Renewable Energy Laboratory estimates that the European countries' carbon taxes have already had a significant effect on emissions reductions, up to 15 percent. The University of Ottawa found that the carbon tax implemented in Canada's British Columbia led to a 10 percent reduction in greenhouse gas emissions in the province, compared to less than 5 percent for the rest of the country, where comprehensive carbon taxes were not applied.

A carbon tax would also create better market incentives for energy conservation, the use of renewable energy sources and the development of energy-efficient and low-carbon goods. The permanent change in price signals would stimulate new private sector research and innovation to develop new ways of harnessing renewable energy and energy-saving technologies. It offers opportunities to reform and simplify other climate-related policies that affect the transportation sector and would reduce the U.S. economy's dependence on foreign sources of energy.

The budget could benefit as well. If set at $25 per metric ton on most greenhouse gas emissions measured in carbon dioxide equivalents (e.g. the amount of carbon dioxide that would result in an equivalent level of warming), growing 2 percentage points faster than inflation, could raise gross revenues equal to about 0.7 percent of GDP from 2016-2025 (around $160 billion per year), or net revenues of about 0.5 percent of GDP, after taking account of how other taxes would change, according to Tax Policy Center and Congressional Budget Office (CBO) estimates. The CBO estimates that a $20 per ton carbon tax would increase the price of gasoline by about 20 cents per gallon.

The revenue could be used to reduce other taxes and improve other economic incentives , bolster spending programs, or pay down the debt.

Although a carbon tax would be a new policy for the U.S. government, it has been implemented in several other countries. Administration challenges can be handled by following the procedures used by other countries, piggybacking off of existing U.S. fuel taxes or developing new options.

There are several potential problems with a carbon tax, but each can be addressed. First, while it receives high marks on efficiency criteria when looking at the United States in isolation, a carbon tax could hurt the country if other nations do not adopt similar measures. Robert Stavins of Harvard notes that the largest efficiency gains would come in the form of internationally harmonized climate policies. While the United States is one of the largest per capita emitters of carbon dioxide, China is the largest overall emitter, and the European Union makes a significant contribution as well. Therefore, enacting a program that would lead to better cooperation with other countries and reduce emissions across the world would more effectively deal with the well-known problems brought about by climate change, such as rising sea levels and higher frequency of extreme temperatures. In addition, there are ways to deal with competitiveness issues, including border carbon adjustments, the reduction of other regulations that could accompany a carbon tax, or lower corporate tax rates.

Second, the tax can have a negative impact on low-income households that use most of their income for consumption. But this could be offset in a number of ways, including refundable income or payroll tax credits.

The politics of the carbon tax are not easy. Conservative opposition to a climate-related tax, or any new tax, cannot be understated. More than 160 members of Congress have signed the "No Climate Tax" pledge , opposing carbon tax increases that are not fully offset by other tax cuts. In addition, it would be necessary to provide adjustment assistance for communities and workers affected by the decline in coal consumption that would occur due to higher (after-carbon-tax) prices of coal. There are precedents for this type of assistance, for example, with respect to the tobacco settlement , so it is a feasible proposition.

Moreover, one should not underestimate how difficult it will be for a new president and Congress to thread the political needle, ingeniously bringing an end to an era of partisanship and gridlock. Still, there are rays of hope. The liberal case for a carbon tax is fairly straightforward and hinges on giving incentives to clean up the environment and address climate change. But there is also a conservative case, focusing on the role of public policy to provide insurance against adverse outcomes, to get market incentives right and to obviate more costly approaches, such as regulations, subsidies and mandates. The carbon tax could supplant at least some regulation of greenhouse gases under the Clean Air Act, which the EPA has begun to implement and which most conservatives oppose.

Conservative economists George Shultz and Mankiw have favored a carbon tax. Sen. John McCain, R-Ariz., proposed a cap-and-trade system, which can have similar economic effects to a carbon tax, more than a decade ago and has spoken eloquently on the dangers of climate change. Some of the revenues from a carbon tax could be used to reduce corporate taxes, a proposal that may help garner conservative support.