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Carbon tax would beat green energy credits

A new bill to end U.S. green energy tax credits doesn't go far enough. Washington is struggling with too many expenses and not enough revenue. Replacing preferential treatment for Uncle Sam's renewable energy darlings with a tax on emissions that need discouraging could help fix that – while also reducing market distortions.

Republican Congressman Mike Pompeo on Tuesday reintroduced a measure that would eliminate all tax credits for energy, including the $18 billion (U.S.) worth over a decade renewed in the recent tax deal. Oddly in an era when the federal government needs to cut its bloated deficits, the bill redistributes what could be extra tax receipts back to the private sector by trimming the corporate tax rate – though of course that fits with the spending hawks' idea of depriving the government of revenue.

In reality, the bill has little hope. For one thing, President Barack Obama and his Democratic brethren favour subsidies to developers of greener alternatives to hydrocarbons. But it could trigger a discussion of other, better ideas.

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One would be for the government to hold onto the extra revenue and use it to reduce debt. Policy-makers could also pump up collections further by imposing a carbon tax. That could bring Democrats on board, because it would provide some cover for renewable energy – though as a more generalized approach than targeted tax credits, it would distort markets less. If revenue were applied to reducing debt rather than extra spending, some Republicans might go for it too.

Taxing carbon dioxide emissions at between $10 and $25 a tonne could generate between $60-billion and $125-billion per year, according to Resources for the Future, an environmental research organization. That's a meaningful amount, in the area of 10 per cent of the expected U.S. budget deficit this year.

In today's polarized Congress, getting tax breaks killed off and replaced by a new carbon levy would be a tall order. But radical changes in taxation of all kinds ought to be on the table as part of an eventual broader political deal on revenue and spending. Maybe Mr. Pompeo's effort will one day bring more than hot air.

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