After the election, I suggested that the Obama Administration move forward with a green tax swap -- higher taxes on fossil fuels, coupled with lower payroll taxes in a revenue neutral way. Lately, I have been thinking of another pairing of carbon taxes, this time with grants back to states. Here's an outline:
The knock on carbon taxes is that they affect heavy users more than light users of fuel. That's unavoidable -- that's how the taxes curb the usage -- but there are ways to vary the intensity with which this happens. Suppose that the federal government made an estimate of all the fossil fuels that were used in each state in a base period, like the two years from 2007-2008. The federal government could then rebate the tax revenues to each state in proportion to its base-period usage. States that made reductions in usage relative to the base period would receive a net gain from the tax. The estimates might be done on a per capita basis, to account for changes in population over time.
We might find that some states had creative projects for conservation or for alternative energy production. With the proceeds of the tax, they would have revenue to undertake those investments. But we might find that the citizens of some states simply did not want to engage in anything more "green" than they are currently doing. With the rebate, these states could be assured that if they wanted to simply offset the higher federal taxes with lower state taxes, they could. But even in those states, we might hope that they eventually let some of the price increase stay. They could provide a rebate for fuel consumption on state income taxes that phased out at higher incomes, for example.
The net effect of this economically is not necessarily different than if each state decided that it wanted new revenue from higher fuel taxes and implemented these policies. But the political process has been very slow to acknowledge the necessity of higher fuel prices if consumption is to be reduced. The "Green Tax Rebate" changes the political dynamic in state legislatures from "should we raise taxes on fuel" to "how should we spend this revenue stream." That might generate more interesting policies, if the federal government can take the lead.