Democrats Prep Carbon Tax Option to Pay for Spending Bill

(Bloomberg) -- Senate Democrats are developing a carbon-tax proposal that could potentially be used to offset some of the costs of a sweeping social-spending bill as well as direct cash payments to households, according to a key lawmaker.

“It’s projected that making polluters pay -- when combined with clean energy tax credits -- would lower the cost of clean electricity for Americans,” Senate Finance Committee Chairman Ron Wyden said in a statement to Bloomberg News Friday. “I’ve worked on this for years, and have continued to develop the proposal as part of my menu of options for the caucus.”

A “substantial portion” of the revenue generated from a carbon tax would be disbursed to Americans in the form of cash payments, Wyden said. That could help increase public support for the tax, but would also mean less money to offset the cost of the up-to-$3.5 trillion so-called reconciliation bill.

That bill, incorporating the bulk of President Joe Biden’s long-term economic agenda, includes overhauling climate investment and directing money into health and education programs. Negotiations on are ongoing on Capitol Hill.

The New York Times earlier reported Wyden’s plans to pursue a carbon tax.

Industry’s Stance

Momentum for such a levy is growing as a way to address climate change. And economists have long favored a carbon tax as a straightforward approach to putting a price on the greenhouse-gas emissions.

Advocates say it would encourage companies and consumers to pollute less. The American Petroleum Institute, the oil-industry trade group that counts Exxon Mobil Corp. among its members, and the Chamber of Commerce have both endorsed a price on carbon, which could take the form of a levy. 

But industry supporters generally want the carbon tax imposed as a substitute for existing regulations on greenhouse gases -- a tradeoff that is unlikely to be part of the plan Democrats are assembling. 

Though several Senate supporters have been eyeing the reconciliation bill as a potential pathway for the tax measure for more than a year, it’s gained momentum over the last several weeks, according to a person familiar with negotiations on the issue. The tax is appealing because of its role as a potential revenue-raiser, but lawmakers are also working to ensure that a significant chunk of the proceeds goes back to middle- and low-income families.

A carbon tax could draw more support as a way to replace other revenue raisers, assuage moderates’ concerns about the size of the package and give the Biden administration tangible proof of robust U.S. plans to slash greenhouse-gas emissions before a critical UN summit in five weeks. 

Still, a tax that could increase the costs of driving, flying and consumer goods is likely to face stiff political resistance from some quarters, and Republicans previously have voted against the concept of placing a tax on carbon dioxide. Some moderate Republicans, including Lisa Murkowski of Alaska and Mitt Romney of Utah have signaled they are receptive to the idea.

GOP opposition wouldn’t be able to nix the proposal, because Democrats aim to pass the tax-and-spending bill on a party-line vote. Still, Democrats have tight majorities in both chambers, meaning that they need nearly every member in the House and all 50 caucus members in the Senate to support the legislation.

Coal Country

Senator Joe Manchin, a moderate Democrat who represents coal-reliant West Virginia, would be a key consideration in the drafting of a carbon tax. Manchin has been non-committal on the issue, but voted with members of his party on a messaging amendment earlier this year in support of such a tax.

Supporters argue that a domestic carbon tax would have to be paired with a levy on imports -- known as a carbon border adjustment tax -- to protect U.S. workers in energy-intensive industries and to ensure that companies don’t shift manufacturing out of the U.S. to nations with lax environmental regimes.

National Climate Advisor Gina McCarthy Bloomberg in July that while “it’s not off the table,” there are strategies other than a carbon border adjustment tax that may be more beneficial. Even so, U.S. Special Presidential Envoy for Climate John Kerry on Wednesday dangled the prospect of a tariff on carbon-intensive imports if other nations don’t limit their emissions and reliance on coal-fired power to fuel cheap manufacturing.

(Updates with details on disbursement and outlook from ninth paragraph.)

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