Washington insiders at both ends of the political spectrum have begun talking about a carbon tax.

The document "A Progressive Carbon Tax Will Fight Climate Change and Stimulate the Economy" by Richard Caperton of the Democrat-aligned Center for American Progress (CAP) is a little surprising because the assumption since 2009 has been that some version of a market-based cap-and-trade program was the only politically viable way to put a price on carbon emissions.

Advocacy for a carbon tax by academics at the Republican-aligned American Enterprise Institute (AEI) is astonishing because the word "tax," thanks to Grover Norquist, seemed to have been synonymous with the word "unpatriotic" on that side of the aisle.

But with both parties struggling with how the federal government can put its fiscal house in order, things may have changed.

At an AEI-hosted conference in July, AEI researchers Kevin Hassett and Aparna Mathur and Brookings Institution researcher Adele Morris jointly proposed the idea as part of a broad fiscal reform program because it could be a “significant source of revenue.”  

A tax “starting at about $20 per ton of CO2 in 2015 and rising at 4 percent over inflation would raise over $100 billion in the first year, rising to over $400 billion per year by 2040,” they estimated. And, they added, a tax “that funds deficit reduction or offsets other distortionary taxes would be a lot less costly to the economy than one that doesn’t.”

They recommended a progressive structure so that a rebate program would not be needed to protect vulnerable businesses and those with low incomes.

“A greenhouse gas tax can reduce the need for both more burdensome regulation and other federal outlays and tax expenditures,” they said, putting them in agreement with other AEI presenters who noted that a carbon tax has advantages over the traditional regulation conservatives disdain at least as much, adding that it provides an incentive to reduce consumption, drives emissions reductions via the lowest-cost options, and is more transparent.

California’s just-initiated cap-and-trade program was instituted by a Republican governor committed to action against climate change at a time when conventional wisdom said a carbon tax would be a political impossibility. In its November 14 successful first round, all 23,126,110 metric tons of allowances for 2013 emissions were sold, at bids ranging from $10 to over $90. The average bid price was $10.09 and the median bid was about $13.

Bids exceeded the availability of carbon credits by three times and 97 percent of the credits were purchased by actual businesses, not investors. The auction ran smoothly. The low allowance price was a market-driven indication that the cost of climate change abatement will be affordable. 

A cap-and-trade system is one way to combat climate change, the Caperton call for a carbon tax acknowledged. But 2009 cap and trade legislation could not get through the Senate and a new proposal would be unlikely to get through the present House. “Three years later, cap and trade is off the table largely because of a polluter-funded effort to deny climate science and delay action on pollution reductions,” Caperton wrote. “But Hurricane Sandy, the fiscal cliff, and the debate over clean energy incentives have together made it clear that we must put a price on carbon.”

An effective carbon tax, Caperton wrote, would assimilate to regional environmental programs and target greenhouse gas emissions cuts of seventeen percent from 2005 levels by 2020 and 80 percent by 2050. It would also drive investment in renewables and efficiency, grow green jobs, and prevent polluters from moving to countries without protections.

Like the AEI presenters, Caperton would require a carbon tax to also stimulate the economy, protect vulnerable businesses and those with low incomes, and provide revenues to attack the federal budget deficit.

Indicative of the curious left-right meeting of minds, both the CAP and AEI proposals suggest that a carbon tax of $15 to $25 per ton would accomplish their objectives, a price quite near where the California cap-and-trade auction came out.

But cap-and-trade is “a damaged brand,” Caperton said. “Nobody in Washington is working on cap-and-trade legislation or a Clean Energy Standard at the federal level,” he explained, “because they basically have a zero percent chance of happening. A carbon tax has some momentum behind it that can make it a part of the conversation.”

And, he added, by the time the political process builds offsets, a price floor and ceiling and strategic reserves into cap-and-trade or writes exemptions and compliance flexibility into a carbon tax, “they start to look pretty similar.”

Former South Carolina Representative Bob Inglis, Bush 43 CEA Chair/Romney economic adviser Greg Mankiw, senior McCain campaign advisor Douglas Holtz-Eakin, and former ExxonMobil CEO Rex Tillerson are all Republicans who are on the record supporting a carbon tax, Caperton said, along with some leaders of the Christian Coalition and former Heartland Institute associates in the R Street Institute.

“But,” Caperton acknowledged, “I am unaware of any sitting member of the House or Senate on the Republican side who is supportive of this on the record. That is a reality check for us.”

Tags: aei, american enterprise institute, california, cap, cap and trade, carbon credits, carbon tax, center for american progress, clean energy standard, climate change, democrat, economy, fiscal reform, greenhouse gases, grover norquist