MIT academics propose carbon tax as the solution to America's deficit problems

Compared to the fiscal cliff, a carbon tax would boost growth while cutting emissions.

The Washington Post's Brad Plumer reports on a paper from the MIT Global Change Institute which argues that a carbon tax could, and should, replace the Bush tax cuts in the US.


The authors model what would happen if, this December, Congress enacted a small fee on carbon emissions to fend off a portion of the tax hikes and spending cuts that are scheduled to occur. The carbon tax would be levied directly on fossil fuels—on coal that comes out of the mine, say, or oil that’s shipped in from overseas—and would start at $20 per ton of carbon in 2013, rising 4 percent each year thereafter.

The authors, Sebastian Rausch and John M. Reilly, estimate that this tax would raise $1.5 trillion over the next 10 years.

To advocates of a carbon tax, this paper ought to be a mixed blessing.

On the one hand, the framing of the tax in terms of sensible deficit reduction is one of the better ways to get it in the debate. In both Britain and America, there is – for good or ill – an agreement that high deficits are a major problem which needs to be dealt with, and so hitching any policy to that cause is a far better recipe for success than pointing out its efficacy at fighting climate change.

On the other, the purpose of the tax could get muddled if this is how the debate is to proceed. Look, for example, at debates over the Robin Hood tax. No-one can agree whether it is being implemented to raise revenues, cut down on practices like high-frequency trading, or some undefined mixture of the two.

With a Robin Hood tax, that may be an acceptable confusion, but with a carbon tax, it is undoubtedly introduced to reduce carbon emissions. To think otherwise would be dangerous indeed. And so yoking a deficit reduction program to the tax creates some perverse incentives on the part of lawmakers. For if the tax does succeed in reducing carbon emissions – which the authors of the MIT paper suggest it will, though not by nearly enough to single-handedly solve the problem for the US – then the revenues gathered by it will drop accordingly.

Even so, having a carbon tax is still better than not having one, and the choke point the authors identify – the US fiscal cliff, and all the uncertainty it brings with it – could well be a time for introducing novel legislation of all stripes to the house.

A protest placard from Australia, where the carbon tax is rather unpopular. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Why relations between Theresa May and Philip Hammond became tense so quickly

The political imperative of controlling immigration is clashing with the economic imperative of maintaining growth. 

There is no relationship in government more important than that between the prime minister and the chancellor. When Theresa May entered No.10, she chose Philip Hammond, a dependable technocrat and long-standing ally who she had known since Oxford University. 

But relations between the pair have proved far tenser than anticipated. On Wednesday, Hammond suggested that students could be excluded from the net migration target. "We are having conversations within government about the most appropriate way to record and address net migration," he told the Treasury select committee. The Chancellor, in common with many others, has long regarded the inclusion of students as an obstacle to growth. 

The following day Hammond was publicly rebuked by No.10. "Our position on who is included in the figures has not changed, and we are categorically not reviewing whether or not students are included," a spokesman said (as I reported in advance, May believes that the public would see this move as "a fix"). 

This is not the only clash in May's first 100 days. Hammond was aggrieved by the Prime Minister's criticisms of loose monetary policy (which forced No.10 to state that it "respects the independence of the Bank of England") and is resisting tougher controls on foreign takeovers. The Chancellor has also struck a more sceptical tone on the UK's economic prospects. "It is clear to me that the British people did not vote on June 23 to become poorer," he declared in his conference speech, a signal that national prosperity must come before control of immigration. 

May and Hammond's relationship was never going to match the remarkable bond between David Cameron and George Osborne. But should relations worsen it risks becoming closer to that beween Gordon Brown and Alistair Darling. Like Hammond, Darling entered the Treasury as a calm technocrat and an ally of the PM. But the extraordinary circumstances of the financial crisis transformed him into a far more assertive figure.

In times of turmoil, there is an inevitable clash between political and economic priorities. As prime minister, Brown resisted talk of cuts for fear of the electoral consequences. But as chancellor, Darling was more concerned with the bottom line (backing a rise in VAT). By analogy, May is focused on the political imperative of controlling immigration, while Hammond is focused on the economic imperative of maintaining growth. If their relationship is to endure far tougher times they will soon need to find a middle way. 

George Eaton is political editor of the New Statesman.