CO2 Tax Could Cut Emissions and Reduce Other Taxes, Economists Say

By Nathan Burchfiel | July 7, 2008 | 8:23 PM EDT

( - Taxes on carbon emissions and gasoline are the most efficient and fair way to spur reductions in carbon emissions and dependence on gasoline, according to a panel of economists speaking Thursday in Washington, D.C.

"Once we get people incentivized to conserve gasoline, we don't need the government to do research [into alternative fuels]. The private sector will do the research," Harvard economics professor Gregory Mankiw said during the discussion hosted by the American Enterprise Institute.

Mankiw, a former economic advisor to President Bush, said he supports taxing emissions of carbon dioxide (CO2) as a way to reduce "greenhouse gases" that some scientists believe are affecting global temperatures.

In addition to offering an incentive to reduce CO2 emissions, the revenue raised by taxes on gasoline and emissions could be used to "reduce all income tax rates by two percentage points," he proposed.

Mankiw acknowledged that higher gasoline taxes are "not politically palatable," but he said such taxes would be better than alternatives such as emissions credit trading programs.

Kevin Hassett, director of economic policy studies at AEI, said a carbon tax of $15 per metric ton of emissions would collect about $80 billion a year and increase the price of gasoline by about 13 cents per gallon.

He said it would also increase the price of electricity from gas by about 0.6 cents per kilowatt hour and increase the price of electricity from coal by 1.4 cents per kilowatt hour.

Hassett said the increased revenue would account for 28 percent of corporate tax revenue. By reducing corporate taxes, Hassett said, the United States could lure more businesses to the country.

But if the goal is to reduce CO2 emissions, said American Enterprise Institute scholar Kenneth Green, taxing the emissions won't necessarily be successful. "The carbon tax doesn't guarantee a set level of reductions," he said.

Green, who said he supports a carbon tax but wanted to raise some objections to it, also warned against legitimizing the practice of taxing "externalities" -- a term used by economists to describe the effects of economic transactions on external parties.

And there are still questions about whether human carbon emissions are a source of global warming.

"There's still a chance that global warming may turn out not to be a problem," Ian Parry, a senior fellow at Resources for the Future said, "but ... the balance of the evidence suggests, I think, that there's going to be significant net damages."

Mankiw said he would support carbon and gasoline taxes, even if science proved that global warming was not linked to CO2 emissions, because of the impact such taxes would have on other externalities such as urban congestion and vehicle accident rates.

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