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Carbon Tax 101: Understanding the Potential Effects of “Cap and Trade”

A recent National Association of Manufacturers (NAM) report, Economic Outcomes of a U.S. Carbon Tax, outlines the potential impact of long-debated federal revenue proposals that would increase costs for manufacturers and other large energy consumers in the United States.

Once a bipartisan idea that was passed by the U.S. House of Representatives in 2009, a carbon tax — also referred to as “cap and trade” — has been shelved since the recession took hold four years ago.  An economic resurgence in the United States, however, is expected to breathe new life into the proposal, which would set the nation’s carbon dioxide emissions at specific levels and force energy-dependent industries to pay extra for exceeding their allotment.

Reduced Output and Wages?

Compared with today’s wages, NAM estimates that a carbon tax could reduce worker take-home pay by as much as 8.5% during the next 40 years because of increasing overall energy costs.  This uptick, NAM claims, “would ripple through the economy and result in higher production costs and less spending on non-energy goods.”  In this scenario, manufacturers and other large energy consumers in the United States would pay $20 per metric ton of carbon dioxide until 2018, with a 4% annual increase.  In 2018, an open market would set prices for carbon dioxide credits with the goal of reducing pollution 80% in the United States by 2053.

Overall, NAM estimates that a carbon tax would reduce manufacturing output in the United States by as much as 15% in the coming decades.  The report also paints a bleak picture for the wider U.S. economy if a carbon tax is signed into law.  In addition to lowering economic activity in the United States, it would create inflationary pressure on consumers and give policymakers fewer options when it comes to reducing the deficit.

“A carbon tax would have a net negative effect on consumption, investment and jobs, resulting in lower federal revenues from taxes on capital and labor,” the report states. “The increased costs of coal, natural gas and petroleum products due to a carbon tax would ripple through the economy and result in higher production costs and less spending on non-energy goods.”

Supply Chain Affected

Even though manufacturers and energy producers are expected to be the hardest hit under a carbon tax, other industries up and down the supply chain, too, may have to raise prices and reduce output.  NAM estimates that farmers would face a nearly 10% drop in production in the coming decades under a cap-and-trade system.

A carbon tax also would force transportation companies and commercial services firms to reduce output and raise prices, according to NAM.  Trucking, rail and other non-personal transportation providers would lower production by an average of 1.5% per decade during the next 40 years, NAM estimates, while commercial services providers would reduce output by about 3% over the same period.

“Overall, the net impact of a carbon tax would be negative, as the adverse effects of the imposition of such a tax would outweigh any benefits, including the reduction of the deficit/debt and lower personal income tax rates,” NAM concludes in its report.

Be Prepared

Preparing for any changes to the tax code requires careful planning. And even though a carbon tax is still under debate, its potential effects on your company can be significant.  It is wise to be proactive and discuss with your financial advisor today to see if a carbon tax would affect your plant’s viability in the future.

For more information, contact us at Anna Coldwell at 312.670.7444.

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