Countercyclical Carbon Taxation

By Fester:

I am a Keynesian --- I believe that government should be a countercyclical force in the economy.  When times are good, the government should build up reserves and repay old debts, and when times are tight as no one else wants to risk borrowing or lending money, government with its near infinite time horizons and ability to recoup large positive externalities should step in to alleviate the pain of a recession.  I believe that the US government should run a structurally balanced budget to a mild structural surplus which is why I think the Bush policies are a massive opportunity as well as a real cost.  Large deficits were justifiable in 2001, 2002 and 2003, but we were theoretically 'booming' in 2004 to 2007 when surpluses should have been run to pay off the past. 

Right now the US government is running at a structural deficit.  Obama's pledge to make his tax policies revenue neutral will be a good thing in the shortest of terms, but a negative over the long run as there is not enough to cut from ongoing operations in Iraq, and the perrenial favorite of 'waste, fraud and abuse' to deal with the rising claims against government resources as Medicare looks to become a budget buster in the next decade.  National healthcare or at least the Baucus plan will help on that front, but more revenue is needed.

Kevin Drum looks at a carbon tax as accomplishing both an environmental goal and a bond market goal:

If a cap-and-trade plan were passed in 2009, it would probably take effect in 2012 or so, and the revenue stream would start small the next year and then grow every year after that. That's perfect timing. We don't want to raise taxes right now, but a program that guaranteed a growing revenue stream starting a few years from now would help convince investors that the current budget deficit won't last forever.

A carbon tax would have an added advantage of being an inherently counter-cyclical tax.  It will bring in more revenue during good times as the value of pollution as a by-product of increased production and distribution of goods and power will increase.  However during tough times such as today, miles driven decrease, industrial production decreases, electricity demand decreases.  The value of an annual permit thus decreases which means there is a little more money floating out in the economy as an automatic stimulus.