A carbon tax to fund increased border security?

As the old saying goes, politics makes strange bedfellows.  A national carbon tax to fund increased border security fits that description. President Trump’s request for these funds is a major sticking point with Democrats in the current budget impasse. However, many of the younger generation of Democrats elected to the House in the midterm election strongly support government action to address the climate challenge. 

Is there a way for all sides to declare victory from this solution? Increased funding for border security would allow the president to fulfill a campaign promise that is extremely important to his base. A carbon tax would allow Democrats to score a major climate policy victory. A significant chunk of the revenues from the carbon tax could go to increase the safety of asylum-seekers and the speed at which their requests are processed. The remaining revenues could contribute to the deficit reduction goals of traditional Republicans. Finally, all three groups could claim credit for a reduced risk of global climate change and a more humanitarian approach to dealing with asylum-seekers.

{mosads}How does all of this pencil out? The annual budget of the Department of Homeland Security is approximately $40 billion. Greenhouse gas (GHG) emissions in the United States in 2016, the most recent year of data available, were 6,511 million metric tons. Therefore, a carbon price of $10 per metric ton would raise roughly $65 billion annually, which could double the budget of Homeland Security, with more than $25 billion left over.

What would a $10 per metric ton price of carbon mean for consumers? It would raise the price of gasoline by about 10 cents per gallon. Electricity prices would be less impacted because an increasing share of electricity comes from zero-carbon sources, particularly in the West.

What about the concerns that poorer households would bear a greater share of the economic burden of a carbon tax? A simple solution is an income-based refund of a portion of the carbon tax paid by a household. Based on their annual miles driven and annual electricity and natural gas bills, households would receive a refund of a share of the carbon taxes they paid that declines as adjusted gross income increase. This scheme has the added benefit of encouraging low-income households to file their income taxes, thereby reducing the size of the underground economy.

What could be done with any carbon tax revenues not devoted to increased border security? Because all politicians agree that more jobs are better than less jobs, there is a simple solution: Reduce payroll and income tax rates that dull the incentive to work and increase the cost to firms of hiring workers. This logic is consistent with the intuitive logic that governments should tax things they don’t want their citizens to do, like produce GHG emissions, and reduce the taxes on things they want them to do, like work.

The most long-lasting dividend from this policy is that once the United States has a carbon tax in place, it can pressure other major emitters to price carbon. The United States can impose what are called border adjustments for the carbon content of all imports from countries that do not set an equivalent or higher price of carbon. To see how this works, suppose the United States imports widgets from “Country X,” and it determines that producing one widget yields one ton of GHG emissions. A $10 per ton border adjustment paid by the importing firm would accrue to the United States for each widget sold here.

Border adjustments by United States are legal under the rules of World Trade Organization (WTO) and would provide a strong incentive for Country X to implement a domestic carbon tax, particularly if a significant fraction of its output is sold in countries that price carbon. That is because unless Country X adopts an equal or higher domestic carbon price, the carbon tax revenue from its widget imports goes to the United States. Country X widget producers have to pay the carbon price on imports to the United States under both the border adjustment and domestic carbon price regime. However, Country X, instead of the United States, would capture these carbon tax revenues if it has a carbon price in place that is at least equal to the one in the United States.

{mossecondads}As more countries implement a modest carbon price in response to the imposition of border adjustments by an increasing number of countries with carbon pricing programs, eventually most countries of the world would price carbon. At that point, raising the price of carbon is the least cost approach to achieving significant reductions in global GHG emissions.

Most Americans support increased border security and humane treatment of asylum seekers. Most of these same Americans also believe it is increasingly urgent to address the global climate challenge. With a modest carbon tax all of these goals can be met.

Frank A. Wolak is a professor of economics and director of the Program on Energy and Sustainable Development at Stanford University.