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The Economics of a Carbon Tax

For related articles and more information, please visit OCA's Environment and Climate Resource Center page, Organic Transitions page and our Politics and Democracy page.


CURWOOD: It's Living on Earth, I'm Steve Curwood. For years there's been talk of a tax on carbon pollution as a way to fight global warming. But it's gotten little traction until recently when both conservative and liberal economists have argued that a carbon tax could help cut the federal deficit and keep other taxes low. Joining us to discuss all this is Harvard economist Joe Aldy, a former aide to President Obama. Welcome to Living On Earth!

ALDY: Thank you, it's my pleasure to be here

CURWOOD: Professor Aldy, we asked you to come in because there seems to be all this excitement now in Washington about the prospect of carbon tax. There's been a series of meetings and recently there was a standing room-only meeting at the American Enterprise Institute, which is known for being very conservative and skeptical of the whole notion of dealing with climate issues. Why is Washington suddenly so interested in a carbon tax?

ALDY: Well, I think there are a couple of reasons why Washington is interested in the carbon tax. One is, if you paired it with reducing tax rates, you can actually make our tax system more efficient. I think also it's a function of the math; that when you look at all the alternatives to raising revenues or cutting spending in the tax or fiscal reform debate, there are actually not a lot of very palatable alternatives.

And all of a sudden a carbon tax looks more appealing when you compare it to, say, increasing the payroll tax by two percent. People have talked about the reduction in spending on defense and on entitlements; it's also on par with the home interest deduction. Some people say if we got rid of the home interest deduction that would help close the budget deficit and deal with our long-term debt problems.

None of those are easy options, and I think that when you look at the potential revenue that a carbon tax can raise, that looks more appealing than having to go down some of these other avenues. 
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