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Estimated CO2 Reductions from a Briskly Rising Carbon Tax
The Carbon Tax Center long considered Rep. James McDermott’s “Managed Carbon Price Act,” one of the two most effective climate measures ever introduced in Congress. (The other, the “America’s Energy Security Trust Fund Act” introduced in 2009 and re-introduced in 2015 by Rep. John B. Larson, chair of the House Democratic Caucus and fourth-ranking Democrat in the House of Representatives, had a similar price and ramp-up and therefore a similar emissions reduction profile.) The bill by McDermott, a staunch Democrat who represented Washington’s 7th congressional district from 1989 to 2017, would have established a national carbon tax starting at a rate of $12.50 per metric ton of carbon dioxide, rising annually by the same $12.50/metric ton.
We estimated that the carbon tax levels mandated under the McDermott bill would have reduced U.S. CO2 emissions from fossil fuel combustion by 1/3 within a decade. Using our 8-sector carbon-tax-model spreadsheet, we projected that the bill would have led to the progression of emission reductions shown in the graph below:
U.S. CO2 emissions from burning fossil fuels would decline by 1/3 in the first decade after enactment of Rep. McDermott’s measure, according to projections by CTC. The middle curve, included for comparison, shows emissions if the carbon tax is set at the “social cost of carbon.”
Discussion
Carbon taxes embody the principle that truthful prices for fossil fuels must include the “externality costs” that their burning imposes on society, i.e., that polluters should pay for the damage caused by polluting. Briskly increasing carbon taxes will instill in energy consumers and producers strong incentives to efficiently reduce their use of fossil fuels and the attendant emissions of carbon dioxide while increasing efficiency and shifting to renewable energy.
The “supply-side response” will materialize largely through investment — for example, in carbon-free wind or solar power farms or lower-carbon gas-fired generating plants, or possibly in low-carbon biofuels. The “demand-side” response will arise in literally millions of decisions, ranging from the choice of car to drive (in multi-car households) to longer-term location decisions of families, businesses and institutions, all reflecting the fact that usage is at least somewhat sensitive to price, i.e., there is some “price-elasticity” (to use economic jargon) in energy usage.
To capture these responses quantitatively, CTC has developed an 8-sector National Carbon Tax Model, which we update every year or two. The model captures both demand- and supply-side responses to carbon taxes and incorporates time lags in end-users’ responses to the tax-induced higher prices. It divides U.S. CO2 emissions into seven sectors: electricity, which in 2015 accounted for 37% of nationwide CO2 emissions; personal ground travel, accounting for 22% (almost entirely from burning gasoline); freight (goods movement), 9%, largely diesel fuel for trucks; jet fuel for air travel (4%), oil refining (6%), other petroleum (also 6%), natural gas other than for electricity (11%), and, an eighth “sector,” miscellany (5%).
We apply separate long-run demand price-elasticities — 70% for electricity, 35% for gasoline, 60% for jet fuel, and 40-50% for the other sectors — with further assumptions for supply-side substitution of carbon as well. (All assumptions are detailed in the spreadsheet; users may input their own. Readers interested in the carbon contents of electricity and various fuels may also wish to examine our Carbon Contents spreadsheet.)
As configured in the file version, the model assumes an initial (year-2016) carbon tax of $12.50 per metric ton of carbon dioxide, ramped up each year by the same $12.50 per metric ton (so that the tax level in the tenth year is $125 per metric ton of CO2, which equates to $113.40 per short ton, for example). The model indicates that such a carbon tax would, by 2026, result in U.S. CO2 emissions falling 31-32% below today’s baseline projections for 2026, and 41% below actual CO2 emissions in 2005. Also strikingly, the carbon tax provided in the McDermott bill would cause U.S. petroleum consumption in 2026 to be 26% less than 2005 actual consumption and 19% below 2026 projected consumption (without a carbon tax).
Notes on Price Elasticity
Demand price-elasticity denotes the extent to which rises in price engender a drop in demand. A price-elasticity of 50% means that the drop in demand is half as steep as the price rise. Thus, a 2% increase in price would be required to engender a 1% decrease in demand. Importantly, for large price increases such as we propose over time, the drops in demand would be proportionately less, reflecting the law of diminishing returns. And at the same time the phased-in tax is causing prices of fossil fuels to rise, incomes would be rising, offsetting some of the reductions.
Because many if not most determinants of energy use such as infrastructure, location and capital goods like houses and cars can’t be changed overnight, drops in demand due to higher prices can take years to materialize fully. Our elasticity estimates are “long-run” figures, requiring around a decade to manifest fully, as opposed to “short-run” elasticities that apply to rapid but smaller changes, i.e., within a year. Short-run elasticities also exist, of course, as everybody who hesitates before paying an increased price for a product is aware, but they are less than the long-run values.
In a 2015 blog post, What an Energy-Efficiency Hero Gets Wrong about Carbon Taxes, we explored (and dispelled) some myths about price-elasticity and carbon taxes that are surprisingly widespread, even among veteran environmental advocates and analysts. It remains one of our most widely read posts, and we commend it to anyone seeking to understand how, why and how fast a carbon tax can be expected to cut carbon emissions.
Below we give links to articles and papers on energy price-elasticity in the United States. Some are for a general audience, some are technical. Many focus on automobiles and gasoline, the area of energy use that has been studied the most.
Resources for the Future working paper 23-11, Prest, Fell, Gordon & Conway, Estimating the Emissions Reductions from Supply-side Fossil Fuel Interventions, 2023. Belying the title’s supply-side emphasis, this paper contains an excellent compendium of recent research estimating demand elasticities in the U.S. and some other countries for gasoline and/or crude oil. It finds an average of (negative) 0.35 for crude oil’s elasticity. Though the authors’ assertion that gasoline’s demand elasticity should be double that for crude oil would imply 0.70 for gasoline, we believe that this assertion is somewhat simplistic, especially for the United States, where infrastructure, culture and policy inhibit demand adaptation. All things considered, we believe the paper’s conclusion supports a U.S. gasoline demand price-elasticity greater than 0.35 but not twice as great.
J.E. Hughes, C.R. Knittel, D. Sperling, Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand, 2006, National Bureau of Economic Research. The authors sifted 2001-2006 gasoline use data and found price-elasticity to be minuscule — just 4% in the short-run and, though they didn’t quantify it, not much greater in the long-run.
Kenneth Small & Kurt Van Dender, Fuel Efficiency and Motor Vehicle Travel: The Declining Rebound Effect, 2006, revised 2007 (a shorter version was published in Energy Journal in 2007). Small, a Professor of Economics at U-C Irvine and a peerless transportation economist and thinker, co-authored the most perceptive and persuasive analysis of U.S. gasoline demand we’ve seen. The paper analyzed 1966-2001 data for each of the 50 states and found (i) a short-run price elasticity of gasoline of roughly 9% (comprised equally of changes in fuel efficiency and miles driven); and (ii) a long-run price elasticity of gasoline of around 40% (also arising equally from changes in fuel efficiency and miles driven). Note: Prof. Small told us that adding more recent data through 2004 doesn’t alter these findings.
J.E. Hughes, C.R. Knittel, D. Sperling, Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand, 2006, National Bureau of Economic Research. The authors sifted 2001-2006 gasoline use data and found price-elasticity to be minuscule — just 4% in the short-run and, though they didn’t quantify it, not much greater in the long-run.
C. Komanoff, Komanoff letter to Sperling. In a letter sent in December 2006, CTC’s Komanoff asked Prof. Sperling to reconcile his findings above with the contrary findings of Small & Van Dender.
Nicholas Lutsey & Daniel Sperling, Energy Efficiency, Fuel Economy, and Policy Implications, Transportation Research Record, 2005. Though not strictly about price elasticity, this paper deconstructed technical changes in the U.S. auto fleet from 1975 to the early 1980s, a period in which most technical gains were devoted to improving fuel efficiency, and since then, when technical improvements were used “to satisfy private desires (more power, size and amenities).” Anyone seeking to understand automobile fuel economy should read this paper.
Dermot Gately & Hillard G. Huntington, The Asymmetric Effects of Changes in Price and Income on Energy and Oil Demand, 2001, Economic Research Reports, RR# 2001-01, C.V. Starr Center for Applied Economics, NYU. Using 1971-1997 data, and lumping the U.S. with the other (OECD) industrial nations, the authors derived long-run price-elasticities of only 24% for all energy, but 64% for petroleum products alone. (Could fuel substitution be the reason for the disparity?) Encouragingly, they reported a relatively low long-run income-elasticity, 55-60%, for both oil and energy in the OECD countries, indicating that, all things equal (i.e., with constant prices), each 3% growth of GDP gives rise to less than a 2% rise in energy use.
We invite CTC friends and visitors to comment on these materials and to suggest further reading. In 2007 environmental journalist-activist Gar Lipow compiled a handy bibliography of some of the best studies on the price-elasticity of demand for energy. Gar’s summaries of nearly two dozen price-elasticity studies from the U.S. and around the world are an invaluable guide to this important subject.
We also recommend the overview of seven sets of integrated assessment model results presented in “Carbon Taxes to Achieve Emissions Targets, Insights From EMF-24” (Stanford Energy Modeling Forum, 2012) which concluded that a carbon price would need to rise briskly, to roughly $440/ton CO2 by 2050 to reduce U.S. emissions in that year by 80%. That’s a serious price trajectory, in line with CTC’s modeling results.
With U.S. carbon dioxide emissions from fossil fuel combustion currently (2022) hovering above 5 billion metric tons a year, even a midrange carbon tax of $50 per metric ton would generate on the order of $250 billion in annual revenue. The magnitude of this figure underscores the importance of designing and implementing a carbon tax carefully and skillfully.
Table 1 from Jan. 2017 Treasury Dept report noted in text.
Unsurprisingly, this subject has spawned a robust literature. Below, we summarize two excellent resources, from 2009 and 2015, written by pre-eminent experts in carbon tax policy and economics.
An even better starting point is the Jan. 2017) report by the U.S. Treasury’s Office of Tax Analysis, Methodology for Analyzing a Carbon Tax. It’s a superb and mercifully brief (28 pages) guide to the nuts and bolts of administering a carbon tax. The table at left is indicative of its detail. Download here (pdf).
The Design of a Carbon Tax (Gilbert Metcalf & David Weisbach, Harvard Environmental Law Review, 2009; 58 pp.). Here’s the article’s abstract:
We consider the design of a tax on greenhouse gas emissions for the United States. We consider three major issues: the tax rate (including the use of the revenues and rate changes over time), the optimal tax base, and international trade concerns.
We show that a well-designed carbon tax can capture about 80% of U.S. emissions by taxing only a few thousand taxpayers, and almost 90% with a modest additional cost. We recommend full or partial delegation of rate setting authority to an agency to ensure that rates reflect current information about the costs of carbon emissions and abatement. Adjustments should be made to the income tax to ensure that a carbon tax is revenue neutral and distributionally neutral.
Finally, we propose an origin-basis system for trade with countries that have an adequate carbon tax, and a system of border taxes for imports from countries without a carbon tax. We suggest a system that imposes presumptive border tax adjustments, but allows an individual firm to prove that a different rate should apply. The presumptive tax could be based on average emissions for production of the item by either the exporting country or the importing country.
Implementing a US Carbon Tax: Challenges and Debates, a 2015 book compiling articles from the economics literature covering a range of design and implementation issues, edited by Ian Parry, Adele Morris and Roberton C Williams III. Chapters cover these topics:
1. Carbon Taxes as Part of the Fiscal Solution
2. Choosing among Mitigation Instruments: How strong is the case for a US carbon tax?
3. Administration of a US Carbon Tax
4. Carbon Taxes to Achieve Emissions Targets: Insights from EMF 24
5. Macroeconomic Effects of Carbon Taxes
6. The Distributional Burden of a Carbon Tax: Evidence and implications for policy
7. Offsetting a Carbon Tax’s Burden on Low-Income Households
8. Carbon Taxes and Corporate Tax Reform
9. Carbon Taxes and Energy-Intensive Trade-Exposed Industries: Impacts and options
10. The Role of Energy Technology Policy alongside Carbon Pricing
11. Mixing It Up: Power sector energy and regional and regulatory climate policies in the presence of a carbon tax
12. Implications of Carbon Taxes for Transportation Policies
Finally, the excerpts below from a 2007 memo from CTC to a House Ways & Means Committee member setting parameters for administering a federal carbon tax may be helpful.
Tax Upstream
We propose to tax fuels as far upstream as practicable, i.e., at the point where possession of the carbon-bearing fuel passes from the “producer” (e.g., coal mine; oil wellhead or tanker; gas wellhead) to the immediate next entity in the supply chain (e.g., coal shipper or utility; oil refiner or importer; natural gas pipeline). Presumably, each such transfer will be codified in a contract, or at least a bill of lading, specifying the attributes of the fuel.
This will minimize the number of points in the economy at which the tax would be levied. It will also simplify tax treatment of potential downstream carbon control technologies such as CCS (coal capture and sequestration), as discussed below.
Carbon Variability Requires Taxing by Btu, not by Fuel Weight or Volume
The tax rates will be stated in dollars per million Btu of heat content for each fuel. A more familiar approach based on physical quantities of fuel isn’t tenable, due to wide natural variations in carbon content within each fuel type. These variations are most stark for coal. A ton of lignite typically contains around 40% less carbon than a typical ton of bituminous coal, for example. To tax the two respective tons at the same dollar rate would be grossly unfair since combustion of the lignite ton releases 40% less carbon into the atmosphere than for the bituminous ton. Actual disparities would be even more pervasive and pronounced on account of variations in carbon content per ton within each major coal category (bituminous, subbituminous and lignite).
Fortunately, variations in carbon content of coals correspond fairly closely to variations in Btu content. This isn’t surprising, since it is the combustion of carbon into carbon dioxide that produces almost all of the heat energy released by burning any type of coal. Thus, lignite and bituminous coal differ by only 5% on average in carbon content per million Btu; differences in carbon per Btu among different batches of coals within the same category are probably less still.
Our approach, therefore, is to specify standard (and slightly different) tax rates for the three categories — bituminous, subbituminous and lignite — and to offer coal purchasers the option of applying for a lower tax rate than given in the standard schedule, on the basis of a coal assay performed and substantiated by a licensed, bonded entity, subject to random spot checks for accuracy.
Petroleum (Oil)
Taxing the carbon content of petroleum presents a different set of issues because of the dozen or more different petroleum products, each of which has its own carbon profile. For example, a barrel of residual fuel oil contains roughly 15% more carbon than a barrel of gasoline. This variability can be circumvented by (i) expressing the carbon tax for petroleum in the same terms as the tax for coal, i.e., in dollars per million Btu of heat content, and (ii) levying the carbon tax on crude oil as possession passes from the producer to the refiner or pipeline. (Where one company owns both entities in the transaction, the tax can be charged at the point of transfer from the producing “business unit” tothe refining or pipeline “arm.”) This approach has the added virtue of maximizing incentives to refrain from flaring and venting of carbon-bearing gases and liquids and thus to maximize energy outputs per unit of carbon emitted.
At the same time, however, the United States imports significant quantities — several million barrels per day, overall — of refined petroleum products such as gasoline, heating oil, residual fuel oil and jet fuel. Because each has a distinct carbon profile, it is advisable to establish individual product tax rates, also in dollars per million Btu of heat content, to apply to imports of petroleum products. (Crude oil imports would be taxed at the standard “domestic” crude tax rate.)
The assay option noted above for coal, whereby coal purchasers could apply for a lower tax rate on the basis of a certified assay, and again subject to random spot checks for accuracy, would also be available to oil pipelines and refiners.
(Note: the final memo will contain rates for another 8-10 petroleum products; each will be in the vicinity of the range shown here for gasoline, resid and crude.)
Natural Gas
Natural gas exhibits little variability in carbon content per million Btu of heat content, and thus one figure should suffice, with the assay option still available to cover special cases. [We will check to ensure that LNG arriving by tanker has the same carbon-to-energy ratio.] The tax would be charged at the wellhead in order to maximize incentives to refrain from flaring.
Rebates for CO2 Control
The bill should provide the opportunity for partial or total rebate of the tax payments if the paying entity can prove that some or all of the carbon dioxide emissions will be kept from entering Earth’s atmosphere for millenia. This rebate approach has several virtues:
* It provides fair and workable treatment of “partial combustion” which will vary by user and use (e.g., unburned coal in ash that is returned to the mine for underground disposal; possibly also cement manufacturing, and plastics manufacture).
* It creates positive incentives to minimize emissions.
* It puts the burden on the fuel producer to demonstrate emissions avoidance (as opposed to a partial tax which allows the producer to reduce taxes unilaterally and burdens the government with substantiating a rebuttal case).
Procedures for producer documentation of CO2 avoidance and/or sequestration will be spelled out in the next iteration of this memo.
Tax Rates
Following are tax rates consistent with charging $50.00 per ton of carbon (not carbon dioxide) emitted. Consistent with the intent of phasing this level in over a five-year period, the rates for years 1 through 4 would be calculated by multiplying the rates in the table by 20%, 40%, 60% and 80%, respectively.
Frequently Asked Questions and Answers about Carbon Taxes and the Carbon Tax Center
1. Who/what is the Carbon Tax Center?
CTC is a 501(c)3 non-profit that since 2007 has given voice to Americans who believe that taxing carbon pollution — the primary greenhouse gas — is imperative to reduce global warming. Co-founders Charles Komanoff and Dan Rosenblum brought to CTC a combined six decades of experience in economics, law, public policy and social change. CTC educates and informs policymakers, journalists and other opinion leaders, grassroots activists and the public about the need for significant, rising and equitable taxes on carbon emissions from fossil fuels. Though Dan has moved on, Charles remains as CTC director.
2. Why are carbon taxes essential?
The transformation of our fossil fuels-based energy system to reliance on energy efficiency, renewable energy and sustainable fuels won’t happen fast enough without carbon fees or taxes sending the appropriate persistent and rising price signals into every corner of the economy and every aspect of life. Or, in the words of Brookings economist (and carbon tax supporter) Adele Morris, “As long as burning dirt (i.e., fossil fuels) is the cheapest form of energy, that’s what we’ll do.” Conversely, raising fossil fuel prices with carbon taxes will motivate switches to clean energy across the economy by making it more economically rewarding to move to non-carbon fuels and energy efficiency.
3. How serious is the climate crisis?
We agree with pioneering climate-scientist James Hansen that the continued buildup of greenhouse gases in Earth’s atmosphere has begun causing cataclysmic change in our planet’s climate and ecology. Denialists’ claims that global temperatures are receding are blatantly false; new records are set almost monthly, and both 2016 and 2015 smashed prior records (see graphic). Nor just sweltering summers but forest fires and die-off, drowned coastal regions, decimated food chains, spreading disease, economic devastation, warfare and massive migrations of humans and other species are all virtual certainties in the lifetimes of many people now living, unless the world makes sharp cuts in greenhouse gases.
4. How much of greenhouse gas emissions are from fossil fuel burning?
For the U.S., carbon dioxide released by burning oil, coal and natural gas makes up 82% of total greenhouse gas emissions (weighted by climate-change impact), according to the U.S. Department of Energy. The remainder is methane (9%, from landfills, coal mines, oil and gas operations and agriculture); nitrous oxide (5%, from burning fossil fuels and from certain fertilizers); refrigerants and other “engineered” chemicals (2%); and carbon dioxide from other sources (2%).
5. What is the U.S. share of world greenhouse gas emissions from fossil fuel burning?
The U.S. slipped behind China as the world’s largest emitter of carbon dioxide, the principal greenhouse gas, a decade ago. Nevertheless, the U.S. still accounts for nearly 20% of the world’s CO2 emissions from fuel-burning. Because Americans are less than 5% of world population, per capita we emit almost 5 times as much CO2 as the average non-American. The historical disparity is even greater, and because CO2 molecules persist in Earth’s atmosphere for around a century, our past emissions are disproportionately responsible for climate change now and in the future. On any moral calculus, the United States bears a heavy responsibility to cut emissions massively and rapidly.
6. Why does CTC support carbon tax shifting?
The potential carbon tax burden on low and moderate-income households can be averted by returning the tax proceeds to Americans. This can be done through periodic pro rata “dividends” or by reducing the tax burden of regressive taxes such as the federal payroll tax or state sales taxes (depending upon whether the tax is imposed at the federal or state level). Shifting the tax burden to pollution and pollution-generating activities will create powerful incentives to use less energy and emit less CO2 while simultaneously promoting tax equity and minimizing the impact of the carbon tax on those with lower incomes.
7. Why should we CTC support both carbon taxes and energy-efficiency standards?
Energy standards have improved energy performance by forcing product design changes in critical sectors such as major appliances and U.S.-made automobiles, as we noted in one of our most popular blog posts. Standard-setting takes a long time, however. Moreover, standards tend to be static whereas energy use is ever-evolving. Combining carbon taxes with efficiency standards will achieve far more than the latter alone by motivating manufacturers and builders to proactively maximize energy efficiency while giving consumers ongoing incentives to make cost-effective choices valuing efficiency in shopping, traveling and purchase of homes and other durables.
8. Why not just subsidize renewables?
Federal payments to wind generators for each kWh produced, accelerated depreciation allowances for solar photovoltaic cells, and state “Renewable Portfolio Standards” mandating purchases use of renewable power have helped jump-start these sectors, bringing down costs and establishing renewables as culturally viable and politically salient. But energy efficiency is just as vital. Unfortunately, subsidizing efficiency is impracticable due to the distributed and dispersed nature of energy efficiency investments and choices. Moreover, a carbon tax will help wind and solar power speed their rise from their 3% niche (as of 2017, when wind + solar accounted for 8% of U.S. electricity) to a majority share of energy. (For a full exploration of these issues, read CTC’s Jan. 2014 Comments to the Senate Finance Committee.)
9. Why not just withdraw fossil fuel subsidies?
Of course we should zero out tax breaks, lease loopholes and other giveaways to the fossil fuel industry, along with the bloated and unsupportable ethanol mandate. But the impact on U.S. fossil fuel use would barely be noticeable. Authoritative sources such as EarthTrack have placed the fossil fuel industry’s tax and fiscal subsidies at around $25 billion a year, a figure that pales beside the roughly $1,000 billion (one trillion dollars) paid annually for coal, oil and natural gas burned in the U.S. Do the math: withdrawing those subsidies would lead to at most a 2-3 percent rise in the market prices of fossil fuels — scant incentive to reduce their use and concomitant emissions of CO2.
10. Why not just let market forces lift fuel prices?
Market signals are too volatile in the short term and too weak in the long term to provide the incentives needed to rewire the U.S. for energy efficiency and renewables. Moreover, high prices alone, whether due to geological depletion or plain old gouging, line the pockets (and magnify the political power) of the energy industry and ravage the poor and middle class. They’re even counter-productive, since high prices, absent a carbon tax, unleash production of CO2-intensive “extreme” fossil fuels from tar sands, mountaintop detonation, and fracking. Only carbon taxes combine market correctives with protecting American families and our environment.
11. Why not let technology remove carbon pollution from coal-fired smokestacks?
Rather than take positions on competing technologies, CTC works to remedy the market failure that allows burning of gas, oil and coal without charging for the resultant climate damage. Thus, we neither favor nor oppose so-called “clean coal,” i.e., combustion of coal with carbon dioxide captured and sequestered from the atmosphere; though we’re not bullish on Carbon Capture and Storage in light of the considerable (~30-40%) oversizing of generating capacity and coal throughput required to process flue gas to safely remove 90% or more of the CO2. In any event, every serious carbon tax proposal has a provision to credit working CCS systems via a rebate or netback for CO2 demonstrably sequestered from release to the atmosphere.
12. Will a carbon tax lessen U.S. oil dependence?
You bet. Petroleum products account for around 45% of U.S. CO2 emissions from burning fuels (coal and natural gas are responsible for roughly 25% and 30%, respectively), so a carbon tax stiff enough to cut down heavily on CO2 will necessarily put a big dent in oil consumption. According to our own modeling, Rep. Larson’s bill would, by its tenth year in effect, reduce U.S. use of petroleum by nearly 20% below “business-as-usual” levels (i.e., without a carbon tax or equivalent price on carbon emissions).
13. Would taxing carbon be regressive?
Any flat tax is regressive, but the regressivity of a tax on carbon pollution could and should be minimized or even reversed by making sure a fair share of tax revenues flow to the less affluent. The key is that wealthier households use more energy, on average – they drive and fly more, have bigger (and sometimes multiple) houses, and buy more stuff that requires energy to manufacture and use. A majority of carbon tax revenues will come from families of above-average means, which creates a basis for “progressive tax-shifting”: transferring a portion of the tax burden from regressive taxes such as the payroll tax (at the federal level) and the sales tax (at the state level) onto pollution and pollution-generating activities. Another progressive approach is to rebate the carbon tax revenues equally to all U.S. residents — a national version of the Alaska Permanent Fund, which for decades has annually sent identical checks to all state residents from earnings on investments made with the state’s North Slope oil royalties. Because income and energy consumption are strongly correlated, most poorer households will get more back in rebates or tax savings than they pay out in the carbon tax. The Citizens Climate Lobby is the leading proponent of this “fee-and-dividend” approach.
14. How can impacts on poor families be lessened?
Impacts of carbon taxes on poor families can be lessened by: 1) progressive tax-shifting as just described; 2) pro-rata distribution of the carbon tax revenues to every U.S. resident (also described above); and/or 3) to the extent necessary, funding programs designed to help poorer households use less energy driving and at home. See Offsetting a Carbon Tax’s Costs on Low-Income Households (Congressional Budget Office, 2012).
15. How much revenue will carbon taxes generate?
A lot, if taxes on carbon pollution rise briskly enough to have the needed climate impacts. Rep. Larson’s bill would start modestly at $15 per ton of CO2. That $15 per ton CO2 tax would bring in $80 billion of revenue, which equates to around $250 per U.S. resident, or $1,000 for a family of four. (Thus, if carbon revenue are distributed as per capita “dividends,” that family receives $1,000. If that family uses less fossil fuel energy than average, their increased costs will be less than $1,000, so they’ll come out ahead.) Successive annual carbon tax increments adding $12.50 per ton will add to the annual revenue stream, though at a declining rate as CO2 emissions fall each year in response to the rising CO2 price. By the end of the tenth year, the annual revenue will be on the order of $440 billion. We estimate that this brisk rise in the cost of CO2 pollution will reduce U.S. emissions dramatically, by about 1/3.
16. How will carbon taxes be administered?
The tax will be levied at the wholesale level of the fuel supply chain, as far upstream as practicable. Electric generators will pay the mandated carbon tax to their coal or natural gas suppliers, who will forward the payment to the government; the generators will pass along the tax to the retail electric utility which in turn will charge it to customers – to the extent that market conditions allow. Similarly for petroleum products (e.g., gasoline, jet fuel, heating oil), with government collecting the tax from refiners or importers of refined petroleum products, and the taxes passed on to oil wholesalers and eventually to retail customers. This approach will maximize accuracy and incentives and minimize paperwork and leakage.
About 1,200 to 1,500 fossil fuel energy producers will pay carbon taxes. According to Jack Calder of EPA, whose paper “Administration of a U.S. Carbon Tax” forms Chapter 3 of “Implementing a US Carbon Tax: Challenges and Debates,” approximately 150 petroleum refineries, 500 – 800 coal producers (depending on the point of compliance) and about 500 natural gas distributors will be taxed. Gilbert Metcalf and David Weisbach offer more detail in The Design of a Carbon Tax (Harvard Environmental Law Rev, 2009). A January 2017 report from the U.S. Treasury’s Office of Tax Analysis, Methodology for Analyzing a Carbon Tax, is a superb (and mercifully brief, just 28 pages) guide to the nuts and bolts of administering a carbon tax.
17.Will carbon tax “dividends” be subject to federal income taxes?
It is likely that the carbon dividends (periodic payouts to households or individuals under a fee-and-dividend system) will count as taxable income. But the additional federal revenue from the taxes received on the dividend income could be added back to the dividend pool being divvied up and returned to households, thus preserving revenue-neutrality.
It is true that this will add a step or two to the Treasury’s bookkeeping; and that it would alter somewhat the distributive patterns from a pure (untaxed) dividend system. The net effect will probably make fee-and-dividend even more income-progressive, since wealthy individuals and households tend to pay a higher percentage of their gross income as taxes than non-wealthy taxpayers.
18. How will carbon taxes handle carbon sequestration? Plastics? Petrochemicals?
Offsetting credit will be provided to the extent the carbon dioxide is actually sequestered, in order to eliminate any disincentive to sequestration. Releases of CO2 from converting fossil fuels to plastics or petrochemicals in non-combustion processes will be taxed at the same level as CO2 emitted in the production of energy or for transportation purposes.
19. Will a carbon tax apply to nuclear power?
A carbon tax will only be imposed on the use or combustion of carbon and the resulting emission of carbon dioxide. A carbon tax would not be imposed directly on the generation of nuclear power, though of course it would apply to any CO2 released in mining, enriching and transporting uranium, in other uses ancillary to the generation of nuclear power (such as fuel used for back-up generation), and in storing radioactive wastes.
20. How high should carbon taxes go? How fast should they climb?
While carbon taxes will need to be rise briskly to create the required price incentives, they will need to be phased in to give individuals and businesses the opportunity to adjust. There’s no magic formula or perfect number, but a tax that grows fast enough to reduce CO2 emissions by 1/3 within a decade probably offers a viable combination of meaningful incentive and opportunity for adaptation. The $15 per ton of CO2 “starter tax” mentioned earlier, equating to around 14 cents a gallon of gasoline, fits the lower end of that range. At least as important as the tax level is the commitment to keep raising the tax, preferably annually, so that energy-critical decisions, from car-buying (Hummer vs. Prius) to home-buying (exurb vs. transit-oriented community) to factory locating (highway interchange vs. rail line), are made with carbon-appropriate price signals.
21. Must carbon taxes be global to work?
Though carbon taxes can be applied locally, nationally or globally, the eventual goal is a global tax. Not only is the climate crisis global in both scope and solution, but a global carbon tax will avert potential leakage by carbon emitters attempting to move their combustion of carbon from countries that tax carbon to those that don’t. U.S. carbon tax legislation should include border tax adjustments to help protect domestic industry from unfair competition and to tax imports of other nations until they enact their own taxes on carbon pollution. Still, let’s not make perfection the enemy of the good; carbon pollution should be taxed wherever possible.
22. Why a carbon tax instead of a cap-and-trade system?
Carbon taxes are superior to cap-and-trade programs for seven fundamental reasons:
Carbon taxes will lend predictability to energy prices, whereas cap-and-trade systems will only exacerbate price volatility that discourages investments in carbon-reducing energy efficiency and carbon-replacing renewable energy.
Carbon taxes can be implemented more quickly than complex permit-based cap-and-trade systems.
Carbon taxes are transparent and easily understandable, making them more likely to elicit public support than opaque and complex cap-and-trade.
Carbon taxes aren’t easily manipulable by special interests, whereas the complexity of cap-and-trade leaves it rife for exploitation by the financial industry.
Carbon tax revenues can be more or less guaranteed and integrated into state or federal fiscal policy, owing to their predictability, whereas the price-volatility of cap-and-trade precludes its being counted on as a revenue source.
Carbon taxes are replicable across borders, since the price “metric” embodied in a carbon tax is far more universal than the quantity-reduction metric underlying cap-and-trade.
Perversely, cap-and-trade discourages voluntary/individual carbon reductions, since those cause a lowering of prices of emission permits which undercuts low-carbon investments; carbon taxes are free of this unintended negative consequence.
23. How responsive is energy demand to the price of fuels?
That varies with the type of fuel, the expected persistence of the price change, and the availability of substitutes. The two forms of energy that economists have studied most intensively are gasoline (which in 2014 accounted for 20% of U.S. emissions of carbon dioxide) and electricity (39%). From our own micro-economic analyses as well as a literature review, CTC believes a “price-elasticity” of 35% (or negative 0.35, in the jargon) is an appropriate assumption for gasoline demand, and 70% for electricity. These assumptions mean that drops in demand are less steep than rises in the fuel price but are still substantial. For all other fuel uses, ranging from diesel fuel for trucks and jet fuel for planes to home heating and industrial fuels — the overall price-responsiveness is probably greater than for gasoline but less than for electricity. (See more detailed discussion on our “Effectiveness” page.)
These estimates are “long-run” elasticities, meaning that price rises take years to fully affect demand. Households and businesses can’t overnight adjust their stocks of energy-using equipment (cars, major appliances, office layouts, etc.), nor can they instantly adapt location decisions that determine distances that people and goods travel. On the other hand, carbon taxes and the resulting relative rises in fossil fuel prices will induce reductions in carbon emission rates on the supply side. For example, higher coal prices due to carbon taxing will lead cost-minimizing power grids to more heavily dispatch lower-emitting natural gas power plants in the short run, and to switch increasingly to zero-carbon wind and solar generation over time.
24. What are the non-climate costs of using fossil fuels?
Fossil fuels burden human beings, communities and nature with enormous environmental and social damages apart from destabilizing climate. Chief among them are “traditional” air pollution such as car and truck exhaust and smokestack emissions; destruction of land and water from extracting and transporting fuels; and the militarism, economic inequality and political authoritarianism that is endemic to extractive economies (e.g., Saudi Arabia, Nigeria, Indonesia). Many researchers believe the magnitude of these and other “indirect” costs exceeds the “market” prices paid for coal, oil and gas.
25. What are the ancillary benefits of taxing carbon?
As the previous Q&A suggests, U.S. carbon taxes will deliver vast non-climate benefits by discouraging use of fossil fuels. These will range from better air quality and less strip-mining to reduced entanglement in the unstable and dangerous Middle East and a less powerful fossil fuel industry. Americans can also look forward to a slew of indirect benefits – for example, lighter road traffic arising from a decrease in vehicle-miles traveled, as families and businesses adapt to higher gasoline and diesel fuel prices by trimming their least essential trips and consolidating others.
26. Who favors carbon taxes?
Carbon taxes are supported by a diverse group of opinion leaders, pundits, scientists and economists. The task now is to broaden and deepen support for taxing carbon among both the political elites and the grassroots – and to do so in the face of concerted opposition from fossil fuel interests determined to preserve (and increase!) their sales rather than watch their sector, and profits, shrink as the carbon tax steadily diminishes sales and use of coal, oil and gas.
27. How have past fuel tax efforts fared in the U.S.?
Poorly. The idea of taxing energy to better reflect its full costs collides with Americans’ historical entitlement to cheap energy and the anti-tax ideology of the past 35 years, not to mention the political muscle of the fossil fuel industry. This triad helped kill the last big effort to tax energy — President Clinton’s Btu tax in 1993. Nevertheless, we’re optimistic that making the carbon tax revenue-neutral, with all revenue recycled via tax-shifting or returned via carbon tax dividends, can soften resistance. Indeed, as described in the next Q&A, polls now point to strong support for a revenue-neutral tax designed to combat climate change.
28. What does polling indicate about carbon taxes?
Opinion polls increasingly find Americans grasping the need to address climate change and warming (oops) to a revenue-neutral carbon tax. A January 2015 poll by political scientists at Stanford University and Resources for the Future found that two-thirds of Americans support making corporations pay a price for carbon pollution, provided the revenues are redistributed, i.e., made revenue-neutral. (See graphic at left.)
More recently, in March 2016, nearly two-thirds (64%) of Americans polled told Gallup’s annual environmental poll that they are worried a “great deal” or a “fair amount” about global warming. That figure is up from 55% in March 2015 and is the highest reading since 2008, according to Gallup. (See graphic below.)
Other results from the 2016 Gallup poll are equally striking. They show a record-high share of Americans stating that climate change poses a threat to them and their way of life; a record number agreeing that climate change is caused primarily by human activity; and climate concern climbing across the political spectrum.
On the one hand, just about everything requiring fossil fuels, from a drive in the country to imported produce, will cost more, with prices rising the most for activities or goods that use the most fossil fuels. But the upside is three-fold: (i) your tax reduction or dividend check will offset much, perhaps more than 100%, of those price increases; (ii) you’ll be able to minimize your tax bite by cutting down on fuel usage (e.g., shortening those country drives, buying locally-grown produce, purchasing “green power” from wind and solar cells); and (iii) Americans’ combined behavior changes in response to the carbon tax will go a long way toward protecting the climate and averting the cataclysmic consequences of unchecked global warming.
30. Who’s taxing carbon now?
See our Where Carbon Is Taxed page. Or, download Sightline Institute’s excellent 2014 report, All the World’s Carbon Pricing Systems in One Animated Map, with maps tracing the institution (and, in at least one instance, Australia, the rescission) of carbon taxing worldwide, as well as carbon pricing administered via cap-and-trade programs. The Sightline report includes helpful tables, too.
The most notable carbon tax in the Western Hemisphere remains that in British Columbia. Carbon dioxide emissions from that province, Canada’s third most populous, began to be taxed on July 1, 2008 at a rate of $10 (Canadian) per metric ton and were raised annually to reach the current rate of $30 per metric ton (which equates to just over 20 U.S. dollars per U.S. ton). (We assessed BC’s carbon tax in a December 2015 report.) Voters in Boulder (Colorado) passed a carbon tax referendum in 2006; while Boulder’s tax equates to just $7/ton and applies only to electricity, it nonetheless establishes an important precedent: the first climate-protecting tax ever levied in the United States. Citizens in Washington State and five other states are campaigning to enact statewide carbon taxes.
31. What’s the political strategy for winning carbon taxes?
An effective campaign for carbon taxes must be both intellectually sound and politically palatable. The key point: Taxing climate pollution is economically and morally preferable to taxing productive activity such as work, savings or investment. Instead of discouraging productive effort, initiative and investment as other tax burdens do, a tax on carbon pollution raises the cost of harmful activity and thereby encourages efficiency and renewable energy. Revenues from carbon taxes can fund “dividends” to all U.S. residents or be used to reduce existing taxes, shifting tax burdens onto pollution and pollution-generating activities. Framing taxes on carbon pollution as an embodiment of the “polluter pays” principle unites interests as diverse as environmental-justice advocates, free-market conservatives and classical economists. Sound design of the revenue side of carbon tax legislation will also ensure that people of limited means, who use less energy than average, are made better off, not worse.
32. What can I do to advance carbon taxes?
The big need now is to develop grassroots support for a carbon tax. Start talking about a tax on climate pollution at your local environmental, religious or civic group meetings. Subscribe to CTC’s occasional but timely emails by filling in the sign-up pop-up box on our home page. Join Citizens Climate Lobby, the vital and committed nationwide network of activists that is putting the revenue-neutral carbon tax known as “fee-and-dividend” (delightfully explained in CCL’s 2-minute video) on the policy map. And please donate to the Carbon Tax Center, via our on-line Donate page. It’s contributions from people like you that enable us to conduct research, work on advocacy, and share knowledge and hope on carbon taxing. Thank you.
A “robust” carbon tax — one high enough to significantly change fuel incentives, drive innovation and transform our energy system and culture — is going to generate large amounts of revenue.
Fossil-fuel burning in the U.S. now (pre-pandemic, 2019) emits around 5 billion metric tons of carbon dioxide a year. A carbon tax set at the threshold of robustness — $50 per metric ton — would generate roughly $250 billion a year in new tax proceeds. That’s a significant figure by any measure. It equates to 6-7 percent of total U.S. tax proceeds (currently $3.86 trillion). Spread among the country’s 128.5 million households (as of 2017), it’s $1,950 a year.
Not surprisingly, “what to do with the carbon tax revenue” is the most contentious issue surrounding carbon tax proposals, especially for possible carbon taxes at the federal level where the tax rate could be higher and political divisions are starker.
Revenue-Neutral Carbon-Taxing
Revenue-neutral means that government retains little if any of the tax revenues raised by taxing carbon emissions. Instead, the revenues are returned to the public; with, perhaps, small amounts utilized to assist communities dependent on fossil-fuel extraction and processing to adapt and convert to low- or non-carbon economies.
There are two overlapping but nonetheless disparate reasons for structuring a carbon tax to be revenue-neutral.
One is to appeal to (or appease) voters and elected officials who claim to abhor government and thus don’t want to swell its coffers.
The other is to counter or at least minimize the natural regressivity of carbon taxes by returning revenue in a way that protects the less affluent, while preserving the tax’s price-incentive to reduce emissions. (Keep in mind that wealthier households use more energy, since they generally drive and fly more, have bigger (and sometimes multiple) houses, and buy more stuff that requires energy to manufacture and use.)
There are two primary approaches to returning or recycling the tax revenues.
One approach, discussed below in detail, returns revenues directly through regular (e.g., monthly) “dividends” to all U.S. households or residents. Every resident or household receives an equal, identical slice of the total carbon revenue “pie.” In this approach, which adherents at Citizens Climate Lobby call fee-and-dividend, each individual’s carbon tax is proportional to his or her fossil fuel use, creating an incentive to reduce; but everyone’s dividend is equal and independent of his or her usage, preserving the conservation incentive. Alaska’s dividend program has provided residents with annual allotments from the state’s North Slope oil royalties for three-and-a-half decades.
In the other revenue-return method, each dollar of carbon tax revenue triggers a dollar’s worth of reduction in existing taxes such as the federal payroll tax or corporate income tax — or, on the state level, sales taxes. As carbon-tax revenues are phased in (with the tax rates rising steadily but not too steeply, to allow a smooth transition), existing taxes are phased out. While this “tax-shift” is less direct than the dividend method, it too ensures that the carbon tax is revenue-neutral. It offers other important benefits, as well; for example, reducing payroll taxes could stimulate employment.
To repeat: each individual’s receipt of dividends or tax-shifts is independent of the carbon taxes he or she pays. That is, no person’s benefits are tied to his or her energy consumption and carbon tax “bill.” This separation of benefits from payments preserves the carbon tax’s incentive to reduce use of fossil fuels and emit less CO2 into the atmosphere. (Of course, it would be extraordinarily cumbersome to calculate an individual’s full carbon tax bill since to some extent the carbon tax would be passed through as part of the costs of various goods and services.)
Revenue-neutrality not only protects the poor, it’s also politically savvy since it offers a way to blunt the “No New Taxes” demand that has held sway in American politics for decades. Returning the carbon tax revenues to the public would also make it easier to raise the tax level over time, a point made nicely by McGill University professor Christopher Ragan in a 2008 Montreal Gazette op-ed, and subsequently borne out by the experience in British Columbia where a revenue-neutral carbon tax was ramped up in four annual increments; that tax remains politically popular and is driving down emissions.
In any event, either of the two “revenue return” approaches — carbon dividends and tax-shifting — can make carbon taxes income-progressive. Because income and energy consumption are strongly correlated, most poor households will get more back in their carbon dividends or via tax-shifting than they will pay in the carbon tax. The overall effect of a carbon tax could thus be equitable and even “progressive” (benefiting lower-earning households).
Revenue-Positive Carbon-Taxing (Investing in Alternatives)
It may seem axiomatic that carbon-tax revenues should fund renewable energy or efficiency upgrades. And that approach always polls well, making it politically attractive.
Nevertheless, climate and energy realities indicate that only a robustly-rising carbon tax can deliver the deep and broad CO2 emission reductions needed to avert climate disaster. Building public support and maintaining the fairness needed for such a substantial carbon tax can most easily be done if all or nearly all of the carbon-tax revenue is returned to taxpayers. See “Making a carbon tax income-progressive” and our blog post: “Which Carbon Tax: Robust or Miniature? (July 7, 2013)”
Dividends
(a/k/a Carbon Dividends or “Green Checks”)
One revenue treatment that is both income-progressive and appealingly straightforward is to return the revenues equally to all U.S. residents. This so-called “dividend” would be a national version of the Alaska Permanent Fund, which since the 1970s has annually sent all state residents identical checks drawn from earnings on investments made with the state’s North Slope oil royalties. (For a federal carbon tax, the “dividend” checks should be provided quarterly or monthly to keep households ahead of the budget treadmill.)
The dividend approach was so attractive and elegant that the nation’s most energetic and active advocacy organization for carbon taxes has organized around it. That’s the Citizens’ Climate Lobby, which calls its approach carbon fee-and-dividend.
Fee-and-dividend explained, Canadian style. Hat tip to @scottsantens.
Nevertheless, it seems fair to say (and important to acknowledge) that by 2018, the second year of the Trump administration, fee-and-dividend has run out of political room. Not a single “sitting” (i.e., still in office) Republican member of Congress has publicly endorsed fee-and-dividend, even as a concept, let alone an actual bill. Yet the premise of fee-and-dividend has always been bipartisanship, since Democrats, with their preference for activist government, would accept a revenue-neutral carbon tax such as fee-and-dividend only if it delivered Republican votes.
For a decade, we wrote glowingly about fee and dividend — most recently in 2017 articles in The Nation and the Washington Spectator. We also praised the Climate Leadership Council’s “carbon dividend” proposal and advocacy in those two pieces and in numerous blogs (here, here, and here, inter alia). But as we wrote in June 2018, we believe that the time for carbon dividend proposals has probably passed. We wrote:
The [political] center to which Baker-Shultz (CLC) and fee-and-dividend (CCL) were designed to appeal barely exists. It’s not just that no sitting Republican has endorsed Baker-Shultz or indeed fee-and-dividend in any form. It’s also that the Democratic majority that will be needed to pass a carbon tax bill appears unlikely to rally around a revenue-neutral carbon tax, whether it’s organized as fee-and-dividend or some form of tax swap.
Economic Progressivity of Fee-and-Dividend
In 2016 CCL released a detailed paper examining how a carbon fee-and-dividend would impact U.S. households. The study took into account geographic variations in electricity sources and gasoline use and drew on a database of carbon intensity of expenditures for 5.8 million households to analyze the net effect of returning revenue to households on a modified per capita basis. Here are the major results:
Percentage of Households Benefitted, by Income Quintile
53% of households (and 58% of individuals) would receive more in dividend payments than they would spend due to higher fossil fuel prices.
Another 19% of households would incur only a slight loss, defined as a net loss no larger than one-fifth of one percent of pre-tax income.
Nearly 90% of households below the poverty line would benefit an average of $311, an increase of roughly 2.8% of pre-tax income.
In contrast, the net loss for the top quintile of households would average $-322 or only -0.18% of pre-tax income.
Notably, these findings support a dividend plan’s ability to transform a carbon tax into a progressive policy that neutralizes the burden that lower-income households would otherwise face, directly and indirectly, due to higher fuel prices. CTC advocates a progressive distributional outcome for both pragmatic and ethical reasons: pragmatically, because a carbon tax will require broad, sustained, public and political support; and ethically, because it’s not tenable to solve the climate crisis on the backs of those who can least afford it.
A Caveat — CBO’s “haircut”
The non-partisan Congressional Budget Office routinely “scores” members’ bills for their prospective impact on tax revenues. To streamline its analyses, CBO long ago settled the so-called “CBO haircut” by which it assumes that one-quarter of indirectly raised revenues would need to be allocated from the tax proceeds in question in order to make up for reduced tax revenues collected from conventional sources such as personal or corporate income taxes. But modeling of carbon tax proposals consistently finds that when revenue is strategically returned by reducing other taxes that tend to slow down economic activity, the net negative impacts are much lower than CBO’s 25% assumption and in some cases may be eliminated altogether. While returning revenue as “dividends” (which economists call “lump-sum rebates”) offers less potential to reduce economic drag than tax shifts, CBO’s assumption still seems like an over-estimate.
In any event, rigid application of the 25% CBO haircut could, on paper at least — and, likely, in Congressional deliberations — limit the carbon tax revenue perceived to be available for “dividends” to 75%. Yet even with this reduced fraction of revenue, returning carbon tax revenue via a direct dividend represents a simple and income-progressive means to make carbon taxes distributionally fair; though with the haircut, the share of households reaping a net benefit via an equal 75% dividend would be lower than the 58% of individuals mentioned above.
The distribution of carbon tax burdens creates an opportunity for “progressive tax-shifting,” in which a portion of carbon tax revenue is dedicated to reducing regressive taxes such as the payroll tax (at the federal level) or sales taxes (at the state level). An early proponent of such a carbon tax shift was Al Gore, with his exhortation to “Tax what we burn, not what we earn.” Shifting taxes away from payroll and/or sales taxes and onto carbon pollution could raise, not lower, the after-tax incomes of a majority of below-median-income households, giving this approach a net progressive effect.
In October 2007, the Brookings Institution published a A Proposal for a U.S. Carbon Tax Swap — An Equitable Tax Reform to Address Global Climate Change by Tufts University economics professor Gilbert E. Metcalf, describing a national carbon tax paired with an income tax credit for payroll taxes paid. Metcalf assessed the impact of a tax of $15 per metric ton of carbon dioxide and five major greenhouse gases. Revenues would be used to credit payroll tax paid on the first $3,660 of earnings per worker. Metcalf showed that such a tax swap would be both revenue-neutral and distributionally-neutral. (Harvard professor and former Bush Administration economist Gregory Mankiw mentioned the Metcalf paper in a Sept. 2007 New York Times op-ed, discussed on our blog.) Rep. John Larson (D-CT) adopted Metcalf’s framework for his “America’s Energy Security Trust Fund Act,” discussed on our Bills page.
More recent analysis has confirmed the importance of carbon tax revenue wisely; using it to reduce other “distortionary” taxes can offer large enough efficiency benefits to reduce or even possibly eliminate the economic drag that a carbon tax would otherwise create. In Deficit Reduction and Carbon Taxes: Budgetary, Economic, and Distributional Impacts (2013) researchers from Resources for the Future found that using carbon tax revenue to reduce corporate income tax rates offers large enough efficiency benefits to more than overcome the efficiency loss of a carbon tax. The next best option is using revenue to cut wage taxes, while using revenue to cutting other consumption taxes is somewhat less efficient. Finally, refunding carbon tax revenue in a “lump sum rebate” (dividend) offers the least economic efficiency benefit.
Reducing the top marginal corporate income tax rate has been articulated as a goal by leaders of both major political parties. In an effort to attract Republican interest, Rep. John Delaney (D-MD) has introduced a carbon tax measure that would devote half its revenue to corporate income tax reduction.
Nevertheless, the growing economics literature on carbon taxes suggests a strong a tradeoff between the efficiency benefits of using carbon tax revenue to cut taxes on capital (as the Delaney proposal would do) and the distributional benefits of cutting taxes on labor (as Rep. Larson’s proposal would).
We welcome your questions, suggestions, constructive criticisms. Please email us at info@carbontax.org. If you’re a journalist on deadline, call CTC director Charles Komanoff at 212-260-5237. (Otherwise, please stick to email, thanks.)
About us …
The Carbon Tax Center (“CTC”) was launched in January 2007 to give voice to Americans who believe that taxing emissions of carbon dioxide — along with commensurate taxes on methane and other greenhouse gases — is imperative to reduce global warming. Founders Charles Komanoff and Daniel Rosenblum brought to CTC a combined six decades of experience in economics, law, public policy and social change. Dan has moved on but Charles remains as CTC director.
Much of the content on our Web site, along with many timely and topical blog posts, was contributed by James Handley, a chemical engineer and attorney who previously worked for private industry and for U.S. EPA. James served as our senior policy analyst from 2012 to early 2016 and prior to that was a stalwart CTC volunteer.
To donate to the Carbon Tax Center
CTC’s work depends on financial support from individuals like you. Your contribution, in any amount, makes our work possible. Moreover, by broadening our base, your contribution makes us more attractive to philanthropic institutions that are potential sources of major support.
The IRS granted tax-exempt status in August 2014. All contributions to the Carbon Tax Center are therefore tax-deductible. You may contribute by mail or on-line. Here’s how:
To make your tax-deductible contribution via mail, write a check or money order to Carbon Tax Center and mail it to Carbon Tax Center, PO Box 3572, Church Street Station, New York, NY 10008.
To make your tax-deductible contribution on-line, click here. Or click on the DONATE NOW button at the top of this site’s Home Page, above the melting iceberg, on the right-hand side of the blue strip. Either way you’ll be directed to a form that will intake your donation in just a minute or two.
Thank you for your generosity and support.
CTC’s Mission
The Carbon Tax Center stands at the front lines of the struggle for a sustainable climate and a habitable Earth. Our mission: to generate support to enact a transparent and equitable U.S. carbon pollution tax as quickly as possible — one that rises briskly enough to catalyze virtual elimination of U.S. fossil fuel use within several decades and provides a template and impetus for other nations to follow suit.
Our mission arises from three fundamental attributes of carbon taxes:
Carbon taxes are powerful: Adoption and global harmonization of national carbon taxes is central to spurring and expanding clean energy to rapidly replace coal, oil and gas whose combustion drives global warming. Indeed, carbon taxing is an essential policy tool for the U.S., China and 190 other nations to fulfill and surpass the “Intended Nationally Determined Contributions” (INDC’s) to which they committed at the UN Paris Climate Summit last December.
Carbon taxes are essential: Alternative approaches — subsidizing clean energy, de-subsidizing fossil fuels, regulating coal-fired power plants, enacting usage-efficiency standards — while laudable and helpful, cannot drive down emissions at nearly the required pace and extent . . . unless they are bolstered by carbon taxes that incentivize the millions of short- and long-term decisions and investments that can move the world’s economies to an all-efficiency and renewable platform.
Carbon taxes are foundational: The “polluter pays” principle inherent in carbon taxing is not only fundamentally just, it is a foundational element of environmental ethics. Carbon taxing also complements the divestment movement by weakening fossil fuel interests and reducing their sway in Congress. Yet carbon taxes, unlike most competing climate policy instruments, can also appeal to the political center and even the right.
Our commitment to a carbon tax is further rooted in the political economy of the U.S. and world energy systems, as captured in this passage we published in early 2014:
The U.S. energy system is so diverse, our economic system so decentralized, and our species so varied and innovating that no subsidies regime, no matter how enlightened, and no system of rules and regulations, no matter how well-intentioned, can elicit the billions of carbon-reducing decisions and behaviors that a swift full-scale transition from carbon fuels requires. At the same time, nearly all of those decisions and behaviors share a common, crucial element: they are affected, and even shaped, by the relative prices of available or emerging energy sources, systems and choices. Yet those decisions cannot bend fully toward decarbonizing our economic system until the underlying prices reflect more of the climate damage that carbon fuels impose on our environment and society. These three facts — the inability of carbon subsidies or rules and regulations to make a big enough dent in carbon emissions, the centrality of price in energy-related decisions that determine the magnitude of those emissions, and the chronic “externalization” of climate damage from the price of energy — are what have led CTC . . . to advocate carbon taxing as the central element of U.S. climate policy.
That’s from our Jan. 31, 2014 report, “Design of Economic Instruments for Reducing U.S. Carbon Emissions,” which we submitted to the U.S. Senate Finance Committee pursuant to Committee Staff’s solicitation for comments on proposed energy tax reform measures. (See page 4; our full 22-page comment document may be downloaded as a pdf.)
Our Board of Directors
CTC has five directors, with Alex Matthiessen serving as board chair. Following are their thumbnail biographies (listed alphabetically):
Nancy Anderson
Nancy E. Anderson, Ph.D. is executive director of the Sallan Foundation, an urban environmental non-profit corporation that advances knowledge and convenes events concerning greener cities, climate change, high-performance buildings and urban energy policy. Earlier, as senior environmental advisor to the NYC Comptroller, Nancy successfully counseled the Comptroller to stop the sale of the City’s water supply, created the Alliance for Clean Water Action, and formulated the scope of work and acted as liaison to the National Academy of Sciences’ landmark NYC watershed study. Nancy’s earlier positions in City government included director of environmental development, director of regulatory review, senior policy analyst in the Comptroller’s office, where she authored the Community Hazardous Materials Right-to-Know Law, and in the Sanitation Department’s Environmental Enforcement Unit. Nancy received her Ph.D. in Sociology from New York University in 1980.
Ernst R. Habicht
Ernst R. (“Hasty”) Habicht, Jr., Ph.D. [in memoriam, 1939-2020] was an energy policy consultant to investment banks, utilities, large energy users, not-for-profit groups and governmental agencies, specializing in the interaction of economic incentives and emerging technologies. Hasty was founder and the first director of the Environmental Defense Fund’s energy program, where he concentrated EDF’s resources on changing electricity pricing policies to reflect the level of system demand. This led to Wisconsin’s adoption of time-of-day pricing in the 1970s and became a foundation of EDF’s efforts to improve environmental outcomes by unifying economic and scientific analysis and applying marginal-cost pricing principles to natural gas, water resources and transportation. Hasty published papers and articles on energy technology and regulation in policy journals and national media and served as an expert witness before numerous regulatory authorities. Hasty earned degrees in chemistry from Harvard College and Stanford University and held postdoctoral and academic positions at the University of California at San Diego.
Charles Komanoff
Charles Komanoff co-founded the Carbon Tax Center and serves as CTC’s director. Charles, a math-and-economics honors graduate of Harvard, has built a distinctive career as energy-policy analyst, transport economist and environmental activist, as well as a visionary advocate of fresh ideas. In addition to directing the Carbon Tax Center he advises the Move NY Campaign to restructure road tolling and transportation finance in New York City. In the 1980s and 1990s Charles helped jump-start the livable streets movement in NYC and nationally as “re-founder” and president of the bicycling-advocacy group Transportation Alternatives and leader of the pedestrian-rights group Right Of Way. Earlier in his career, Charles developed a rigorous narrative documenting the faltering economics of the U.S. nuclear power industry, and as an expert witness for state government agencies helped shield electricity ratepayers from nuclear-related utility cost overruns. His published works include books, long-form journalism in the New York Review of Books, New York Magazine and Orion, and op-eds in the New York Times and other papers.
Alex Matthiessen
Alex Matthiessen, CTC’s board chair, is the principal of Blue Marble Group, an eco-political consultancy from which he manages the Move NY Campaign to reform traffic tolling in New York City and secure new financing for the city and region’s transportation network. Alex also advises for-profit companies in gaining approvals for green projects as well as the Robert Rauschenberg Foundation on climate initiatives. From 2000-2010, he was CEO and president of Riverkeeper, the organization at the forefront of the decades-long campaign to restore the Hudson River and protect the NYC watershed. Previously, Alex served as a special assistant in the Office of U.S. Interior Secretary Bruce Babbitt and was grassroots program director for the Rainforest Action Network. He also serves on the board of Catskill Mountainkeeper. Alex holds a Masters of Public Administration from the John F. Kennedy School of Government at Harvard University, and a BA in Biology and Environmental Studies from the University of California at Santa Cruz.
Ted Loewenthal
Ted Loewenthal, MD, recently retired from a rewarding 35-year career as a physician in clinical practice. Recognized as a leading gastroenterologist in Connecticut, he was affiliated with Hartford Hospital where he oversaw gastrointestinal endoscopy and related quality of care issues. Dr. Loewenthal is the lead environmental trustee for the Common Sense Fund. His energy and passion are directed to addressing global warming. He recently joined the board of Inside Climate News, which won the 2013 Pulitzer Prize in National Reporting for its incisive coverage of climate change, energy and the environment. A graduate from Harvard in chemistry, Ted earned his MD at Tufts University School of Medicine.
Robert Shapiro
Robert J. Shapiro, Ph.D. is co-founder and chairman of Sonecon, LLC, an advisory firm that analyzes changing economic and political conditions in the United States and around the world and their relationship to government policies. Dr. Shapiro is also a senior fellow of the Georgetown University School of Business, advisor to the International Monetary Fund, director of the Globalization Center at NDN, chairman of the U.S. Climate Task Force and co-chair of America Task Force Argentina. From 1997 to 2001, Dr. Shapiro was U.S. Under Secretary of Commerce for Economic Affairs. Earlier he co-founded the Progressive Policy Institute and also served as principal economic advisor to Bill Clinton in his 1991-1992 presidential campaign and senior economic advisor to Al Gore and John Kerry in their presidential campaigns. In 2008 and 2012, he advised the campaigns and transition of Barack Obama. Dr. Shapiro also was Legislative Director for Senator Daniel P. Moynihan and Associate Editor of U.S. News & World Report. He has been a Fellow of Harvard University, the Brookings Institution, and the National Bureau of Economic Research. Dr. Shapiro holds a Ph.D. and M.A. from Harvard, a M.Sc. from the London School of Economics, and an A.B. from the University of Chicago.
An unrelenting string of extreme weather events, including Superstorm Sandy that devastated the New York area in 2012, and topped by Typhoon Haiyan, which reportedly packed the strongest storm winds ever recorded when it laid waste to Guiuan province in the Philippines, bring the message home: Earth’s climate is changing in costly and painful ways. Yet we’ve barely started transitioning from fossil fuels to renewable energy and efficiency. Many factors stand in the way, including this: the price signals are too weak. The prices of fossil fuels don’t come close to reflecting their true costs. This puts clean efficiency and renewables at a stark disadvantage. A robust and briskly rising U.S. carbon tax will reduce the emissions that are driving global warming and generate revenue to pay for cutting regressive taxes that thwart job-creation.
A carbon tax is a direct tax on the carbon content of fossil fuels (coal, oil and natural gas).
Carbon taxes should be phased in so businesses and households have time to adapt.
A carbon tax can be structured to soften the impacts of added costs by distributing tax revenues to households (“dividends”) or reducing other taxes (“tax-shifting”).
Support for a carbon tax is growing among public officials; economists; scientists; policy experts; business, religious, and environmental leaders; and ordinary citizens.
Our Read These First page is a good place to learn about carbon taxing. Another is a point /counterpoint last year in Today’s General Counsel magazine between Carbon Tax Center director Charles Komanoff and a top fossil fuel industry lobbyist. And read our blog post summarizing the comments we submitted to the Senate Finance Committee on Jan. 31. They point the way to a new policy path: replacing the U.S.’s contradictory and costly energy subsidies with a carbon tax.
PS: CTC needs your financial support. Click here to donate. Thank you.
Let this be the year when we put a proper price on carbon
Lawrence Summers, who has served as Treasury Secretary, President of Harvard University and Chief Economist of the World Bank, trenchantly articulated the compelling reasons and auspicious timing for a carbon tax in an op-ed in both the Financial Times and the Washington Post (January 5, 2015). We offer some excerpts:
The case for carbon taxes has long been compelling. With the recent steep fall in oil prices and associated declines in other energy prices it is overwhelming. There is room for debate about the size of the tax and about how the proceeds should be deployed. But there should be no doubt that starting from the current zero tax rate on carbon, increased taxation would be desirable.
[T]hose who use carbon-based fuels or products do not bear all the costs of their actions. When we drive our cars, heat our homes or use fossil fuels in more indirect ways, all of us create these costs without paying for them. It follows that we overuse these fuels. While the recent decline in energy prices is a good thing in that it has, on balance, raised the incomes of Americans, it has also exacerbated the problem of energy overuse. The benefit of imposing carbon taxes is therefore enhanced.
[A] well-designed tax would be levied on the carbon content of all imports coming from countries that did not impose their own carbon levies. The United States can make the case that such a tax is compatible with World Trade Organization rules. Such an approach would have the virtue of encouraging countries who wished to avoid the U.S. tax to impose carbon taxes of their own, thereby further supporting efforts to reduce global climate change.
A U.S. carbon tax would… be a hugely important symbolic step ahead of the global climate summit in Paris late this year. It would shift the debate toward harmonized measures to raise the price of carbon use and away from the complex cap-and-trade-type systems that have proved more difficult to operate than expected in the European Union and elsewhere.
My preference would be for the funds to be split between investments in infrastructure and pro-work tax credits. An additional $50 billion a year in infrastructure spending would be a significant contribution to closing America’s investment gap in that area. The same sum devoted to pro-work tax credits could finance a huge increase in the earned-income tax credit, a meaningful reduction in the payroll tax or some combination of the two.
Progressives who are most concerned about climate change should rally to a carbon tax. Conservatives who believe in the power of markets should favor carbon taxes on market principles. And Americans who want to see their country lead on the energy and climate issues that are crucial to the world this century should want to be in the vanguard on carbon taxes. Now is the time.
Bigger, Cleaner, and More Efficient: A Carbon-Corporate Tax Swap
Donald Marron served as economic adviser to President G.W. Bush, acting director of the non-partisan Congressional Budget Office and executive director of the Joint Committee on Taxation. Marron now co-directs the Urban-Brookings Tax Policy Center. In a 2013 paper, he and Eric Toder analyzed the climate and macro-economic benefits of a carbon tax “shift” to reduce top corporate income tax rates. In the Cato Online Forum (November 2014) Marron outlined the conservative principles behind his proposal to combine effective climate policy with pro-growth economic policy:
Four recurring lessons from tax and environmental policy…
First, taxing bads is better than taxing goods. When the government levies a tax, people and businesses are less likely to do the taxed activity…
Second, putting a price on carbon is the most efficient way to reduce carbon emissions. In the absence of a national carbon price, as from a carbon tax or a cap-and-trade system, policymakers will likely continue to pursue piecemeal regulations and subsidies. Indeed, we see that today in heightened fuel economy standards and state-by-state electric power plant regulations. These regulatory efforts can reduce emissions, but at greater cost per ton than a national carbon price.
Third, the corporate income tax is especially distortionary… it discourages business investment and weakens economic growth… [T]he Organization for Economic Cooperation and Development identified corporate income taxes as having “a particularly negative impact on GDP per capita,” especially through their effect on “dynamic and innovative” businesses.
Fourth, America’s corporate income tax is especially problematic. The statutory tax rate is the highest in the world at more than 39 percent (including federal and state taxes) and the U.S. is one of only a few nations that taxes resident corporations on their worldwide income. At the same time, our corporate system includes many tax breaks that dramatically lower the effective rate some businesses really pay. This toxic mix benefits lawyers and accountants but has made the United States an unattractive place for many firms to maintain their legal residence. One symptom has been the recent increase in tax-driven inversions.
[A] carbon-corporate tax swap, paired with appropriate relief for low-income families, would make our economy bigger, cleaner, and more efficient.
A Carbon Tax Is Our Only Hope
In the edgy “Gawker” magazine (May 27, 2014), Hamilton Nolan trenchantly explained why, if we’re serious about tackling global warming, we need a stiff carbon tax to climate polluters:
Why does a pack of cigarettes cost fifteen… dollars in New York City? Because New York City uses taxes to add the future costs of smoking to the cost of smoking today. We know that smokers end up costing society a lot of money for health care years down the road; with cigarette taxes, smokers in the city pay those costs up front. The realization of the true cost of a negative behavior is quite an effective way to not only pay those costs, but also to change the behavior.
This is the basic rationale for a carbon tax. We know that carbon emissions are causing global warming, which will impose a disastrous cost on all of humanity in the years to come. So make those who emit carbon pay those costs up front, by taxing them…
There is no other tactic that will have as big an impact on carbon emissions within our 15-year window of opportunity for action. Forces that operate solely out of self interest will continue to oppose any and all sacrifices right up until the sea swallows their vacation homes. Forget them. The activists and political leaders who have genuine concern about this issue must all unite around some form of carbon tax as a solution. Fighting polluters on a piecemeal basis will not be enough. Public education campaigns will not be enough. Global warming must be made too expensive to be viable. Tax the hell out of it. It’s not unfair pricing. On the contrary, it is the only way to make carbon emissions exactly as expensive as they deserve to.
Science Is Unequivocal, Policy Is Obvious: Tax CO2 Pollution
New Yorker science writer and author of “Field Notes From a Catastrophe,” Elizabeth Kolbert linked the overwhelming climate science consensus to ith the equally robust climate economics consensus (April 14, 2014):
[T]he Intergovernmental Panel on Climate Change released its latest update on the looming crisis that is global warming. Only this time it isn’t just looming. The signs are that “both coral reef and Arctic systems are already experiencing irreversible regime shifts,” the panel noted… The I.P.C.C.’s list of potential warming-induced disasters—from ecological collapse to famine, flooding, and pestilence—reads like a riff on the ten plagues. Matching the terror is the collective shame of it. “Why should the world pay attention to this report?” the chairman of the I.P.C.C., Rajendra Pachauri, asked the day the update was released. Because “nobody on this planet is going to be untouched by the impacts of climate change.”
Economists on both sides of the political spectrum agree that the most efficient way to reduce emissions is to impose a carbon tax. “If you want less of something, every economist will tell you to do the same thing: make it more expensive,” former Mayor Michael Bloomberg observed, in a speech announcing his support for such a tax. In the United States, a carbon tax could replace other levies—for example, the payroll tax—or, alternatively, the money could be used to reduce the deficit. Within a decade, according to a recent study by the Congressional Budget Office, a relatively modest tax of twenty-five dollars per metric ton of carbon would reduce affected emissions by about ten per cent, while increasing federal revenues by a trillion dollars. If other countries failed to follow suit, the U.S. could, in effect, extend its own tax by levying it on goods imported from those countries.
All You Need to Know About British Columbia’s Carbon Tax Shift in Five Charts
Alan Durning and Yoram Bauman, of the Seattle-based Sightline Institute, graphically illustrated the economic and climate success of their northern neighbor British Columbia’s simple, revenue-neutral carbon tax (March 11, 2014):
BC’s carbon pricing system is the best in North America and probably the world. The province has finished the nitty-gritty work of drafting statutes and regulations to implement the system. Oregon and Washington could do worse than to copy them, word for word, into their tax codes, then make adjustments needed to match circumstances.
Economists Have A One-Page Solution to Climate Change
National Public Radio reporter David Kestenbaum neatly distilled why economists are virtually unanimous in concluding that well-designed carbon taxes offer a win-win for the climate and the economy that no other policy can beat (June 28, 2013):
This is why economists love a carbon tax: One change to the tax code and the entire economy shifts to reduce carbon emissions. No complicated regulations. No rules for what kind of gas mileage cars have to get or what specific fraction of electricity has to come from wind or solar or renewables. That’s by and large the way we do it now.
[MIT economist John] Reilly says the current web of rules is a more complicated and more expensive way of getting the same outcome as a carbon tax. The current system “pretty much is one of the worst ways we could do it,” he says.
… Reilly brings up what is perhaps the most surprising thing about a carbon tax: If you do it right, he says, carbon tax can be nearly painless for the economy as a whole.
Besides reducing carbon emissions, a carbon tax brings in a bunch of money — it’s a tax after all. So, Reilly says, you can reduce, say, income tax to balance out the new taxes people are paying for carbon emissions. People pay more for gas, but they get to keep more of their income.
Laura D’Andrea Tyson: The Myriad Benefits of a Carbon Tax
A Bill Clinton Council of Economic Advisers chair urged carbon taxes as more cost- and climate-effective than regulations and subsidies (New York Times, June 28, 2013)
Without a [carbon] tax, the government has to rely on second-best regulations to limit carbon emissions. Facing Congressional inaction and staunch opposition to a carbon tax, this week President Obama proposed regulations on carbon pollution standards for new and existing power plants using his executive authority under the Clean Air Act.
A carbon tax is also a cheaper and often more efficient way to reduce carbon emissions than subsidies for alternative fuels. Generous subsidies for biofuels have cost billions of dollars; by reducing the price of gasoline they may have perversely increased rather than decreased carbon emissions.
Other subsidies, like the production tax credit, have been successful at ramping up research, development and deployment of alternative energy technologies in recent years. Such subsidies would be even more effective in combination with a carbon tax that would make fossil fuels less price-competitive and would stimulate research on renewable and energy-saving technologies.
The Congressional Budget Office estimates that even a modest carbon tax could reduce both greenhouse emissions and the federal budget deficit. A tax of $20 per ton of carbon dioxide, which would translate to about 15 cents per gallon of gasoline, would reduce emissions by 8 percent and generate up to $1.2 trillion in tax revenues over 10 years.
“[A] Carbon tax…would make polluters pay for their own pollution”
As EPA began rolling out its proposed regulations on power plants, the Washington Post Editorial Board suggested a better way (May 7, 2013):
[A] carbon tax, an elegant policy Congress could immediately take off the shelf… would make polluters pay for their own pollution, which is the best way to encourage greener thinking. It would cut emissions without overspending national wealth on grandiose central planning or command-and-control regulation. And it would raise revenue, which lawmakers could use for debt reduction, lowering other taxes, improving the social safety net or some combination. The carbon tax is one of the best ideas in Washington almost no one in Congress will talk about.
Conservative icons George Schultz and Gary Becker on why they support a Carbon Tax
Nobel-winning economist Gary Becker and Reagan-Nixon cabinet secretary George Shultz proposed to replace costly clean energy subsidies with a far more effective revenue-neutral carbon tax. (Wall St. Journal, April 7, 2013):
[W]e should seek out the many forms of subsidy that run through the entire energy enterprise and eliminate them. In their place we propose a measure that could go a long way toward leveling the playing field: a revenue-neutral tax on carbon, a major pollutant. A carbon tax would encourage producers and consumers to shift toward energy sources that emit less carbon—such as toward gas-fired power plants and away from coal-fired plants—and generate greater demand for electric and flex-fuel cars and lesser demand for conventional gasoline-powered cars.
We argue for revenue neutrality on the grounds that this tax should be exclusively for the purpose of leveling the playing field, not for financing some other government programs or for expanding the government sector. And revenue neutrality means that it will not have fiscal drag on economic growth.
The Market and Mother Nature
Economist and columnist Thomas Friedman urged climate hawks and deficit hawks to find common cause in support of a deficit-reducing carbon tax. (New York Times, January 8, 2013):
I am struck by how many liberals insist on reducing carbon emissions immediately, but, on the deficit, say there is no urgency because no interest rates rises are in sight. And I am struck by how many conservatives insist we must reduce the deficit immediately, but, on climate, say there is no urgency because, so far, temperature rise has been slight… A carbon tax would reinforce and make both strategies easier.
In Defense of a Carbon Tax
Responding to Dave Roberts’ lament that a carbon tax can’t tackle the climate menace, the Carbon Tax Center’s James Handley and Charles Komanoff articulated the importance of an aggressively-rising tax on carbon pollution to meet the challenge. (Grist, Dec. 4, 2012; also presented as a side-by-side rebuttal of Roberts’ 10 points on CTC’s blog):
Assuming 3 percent annual inflation, a [carbon] tax rising 4 percent a year faster than inflation would take a decade to double in nominal terms, and almost two decades to double in real terms. That’s way too slow a ramp-up, considering that a carbon price of $40/ton of CO2 would add a mere 36 cents to a gallon of gasoline and 1.5 cents/kWh to the average U.S. retail electricity price.
We need a carbon tax that quickly gets to much higher rates than that. It doesn’t have to start like gangbusters; indeed, it shouldn’t, since families, businesses, and institutions all need (and deserve) time to adapt to the new reality of higher fuel and energy prices. A steady and steep ramp-up rate is far more important and beneficial than a high starting point.
These considerations make the ideal carbon tax close to that embodied in legislation introduced in 2009 by Rep. John Larson (D-Conn.). Larson’s carbon tax starts at $15/ton and rises each year by $10-$15, with the actual increment depending on whether emissions are being driven down fast enough. In the 10th year of a carbon tax, the CO2 price would be between $100 and $145 per ton of CO2 under the Larson bill… the market pull (including long-term price expectations) should suffice to elicit cleantech innovation and revolution.
An Emissions Plan Conservatives Could Warm To
Former Representative Bob Inglis and former economic adviser to President Reagan, Arthur Laffer framed the conservative values supporting a carbon tax (New York Times, December 27, 2008):
We need to impose a tax on the thing we want less of (carbon dioxide) and reduce taxes on the things we want more of (income and jobs). A carbon tax would attach the national security and environmental costs to carbon-based fuels like oil, causing the market to recognize the price of these negative externalities.
The market-driven innovation that brought us the Internet and the personal computer could quickly bring us new, cleaner fuels. A carbon tax that was fully offset (with payroll or income taxes cut by a dollar amount equal to the revenues generated by the new tax) would be as bold as the threat that we face.
Conservatives do not have to agree that humans are causing climate change to recognize a sensible energy solution. All we need to assume is that burning less fossil fuels would be a good thing. Based on the current scientific consensus and the potential environmental benefits, it’s prudent to do what we can to reduce global carbon emissions. When you add the national security concerns, reducing our reliance on fossil fuels becomes a no-brainer.
Presentations, Videos, etc
The Big Picture: Make Polluters Pay (Robert Reich, MoveOn.org). How a carbon tax can slow global warming and improve the economy. (June 2015.)
Senator Bill Nelson (D-FL) floor remarks (YouTube video) on Pope Francis’ encyclical on climate change. Nelson articulates the climate and economic benefits of revenue-neutral carbon taxes. (June 2015.)
Comprehensive Tax Reform and U.S. Energy Policy (Harvard econ prof. Dale Jorgenson testifies to Sen. Finance Committee, June 13, 2012, recommending environmental tax on fossil fuel as part of broad fiscal and tax reform.
Fuel Taxes and the Poor (The Distributional Effects of Gasoline Taxation and Their Implications for Climate Policy), Thomas Sterner, (economist, editor), 2012
Global Carbon Pricing: We Will If You Will (2015). E-book compiling eight papers by David J. C. MacKay, Richard Cooper, Joseph Stiglitz, William Nordhaus, Martin L. Weitzman, Christian Gollier & Jean Tirole, Stéphane Dion & Éloi Laurent, Peter Cramton, Axel Ockenfels & Steven Stoft. The authors, from a variety of viewpoints and disciplines, conclude that negotiating an explicit global price on carbon pollution would unlock global climate negotiations by aligning national self-interest with the global goal of rapidly reducing greenhouse gas emissions.
This page contains archival material bearing on efforts to advance carbon taxing or other carbon pricing at the U.S. national (federal) level.
It begins with federal legislative proposals from roughly 2008 to 2015, in reverse chronological order. Further below is material from Democratic presidential-nomination campaigning from 2019.
Unfortunately, CTC hasn’t been able to keep up with more recent (post-2015) carbon tax legislation — not that there’s been much to report in this arena. We recommend Mike Aucott’s July 2022 post , A Novel Way to Price Industrial Carbon Emissions, along with our new page about the Inflation Reduction Act of 2022. Although in many ways the IRA is the antithesis of carbon pricing — it aims to make clean energy cheaper rather than to make dirty (fossil) energy costlier — it was a landmark legislative achievement and may eventually open the door to federal legislation to price carbon emissions.
On December 10, 2015, a day before the close of the UN climate summit in Paris, Senator (and presidential candidate) Bernie Sanders introduced the “Climate Protection and Justice Act.” His bill would impose a charge of $15 per metric ton (“tonne”) of CO2 emitted from fossil fuel combustion, with the fee taking effect in 2017. It would then rise at an average annual rate of $3.22/tonne, reaching $73 by 2035. At that point the tax trajectory would change to a percentage basis, growing by 5% annually until attaining a level of $150/tonne in 2050. Proceeds from Sanders’ proposed carbon tax would be returned to households making less than $100,000/year, a rebate of roughly $900 in 2017, rising to $1,900 in 2030. Revenue would also fund investments in energy efficiency and low-carbon energy.
Sanders’ press release claims his measure would reduce U.S. CO2 emissions to 80% below 1990 levels by 2050. The results of seven major integrated assessment models reported by the Stanford Energy Modeling Forum suggest that a more aggressive carbon price trajectory, rising to roughly $440/ton, would be needed to accomplish this ambitious 80% reduction target by 2050, in the absence of major technological breakthroughs. Nevertheless, model results become increasingly murky as time horizons grow more distant. In any event, Senator Sanders is the first (and, as of January 2016, the sole) candidate in the 2016 presidential race to endorse an explicit and rising tax on carbon pollution.
On April 22, 2015, Earth Day, Rep. John Delaney introduced a discussion draft of his “Tax Pollution, Not Profits Act” that would establish a tax $30 per metric ton of carbon dioxide or carbon dioxide equivalent, increasing each subsequent year at 4% above inflation. Delaney’s proposal would apply revenues to reduce the corporate tax rate to 28%, provide monthly payments to low-income and middle-class households and fund job training, early retirement and health care benefits to coal workers. At an Earth Day AEI event discussing his bill, Rep. Delaney took the bold step of suggesting his proposal for a simple economy-wide carbon tax could replace the EPA Clean Power Plan.
On November 19, 2014, Sen. Sheldon Whitehouse (D-RI), renowned for his weekly “Time To Wake Up” speeches on the Senate floor, introduced the “American Opportunity Carbon Fee Act.” This bill would impose fees on both CO2 and non-CO2 greenhouse gases, including fugitive methane from shale gas wells and coal mines, at their CO2-equivalent rates. AOCFA includes a border tax adjustment to impose equivalent climate pollution fees on imported goods from nations that have not enacted their own.
AOCFA pegs its pollution fee to U.S. EPA’s estimate of the “social cost of carbon” currently, $42/ton CO2, and would rise by only 2% annually in real terms. The Carbon Tax Center’s 7-sector price-elasticity spreadsheet model projects that the proposed starting price of $42 per ton of CO2 would quickly reduce US emissions by about 15%. But the bill’s subsequent 2% annual real price increases would barely stem the rising emission tide due to increased affluence, resulting in essentially flat emissions rather than a declining curve.
On May 28, 2014, Rep. McDermott (D-WA) introduced H.R. 4754, a direct and transparent measure to phase out free dumping of climate pollution into our atmosphere. The 21-page bill would steadily raise the cost of climate pollution, enabling investments in renewable energy and efficiency to compete effectively with continued extraction and burning of dirty fossil fuels.
McDermott’s pollution tax would start modestly at $12.50/tonne (metric ton) of CO2 and rise annually by the same amount ($12.50/tonne), reaching $125/tonne CO2 within a decade. The result, according to CTC’s carbon tax spreadsheet model, would be a one-third reduction in U.S. carbon pollution in the tax’s tenth year, vis-a-vis actual U.S. emissions in 2005. By 2030, the target year for the heralded new EPA-White House Clean Power Plan, the McDermott pollution tax would be reducing U.S. CO2 emissions by an estimated 2,051 million metric tons per year, or nearly 6 times the 355 million tonne reduction we have estimated for that year from the Clean Power Plan.
Rep. McDermott’s Managed Carbon Price Act of 2014 compared to June 2014 EPA “Clean Power” proposal
Obviously, a carbon tax like that in the McDermott bill requires an act of Congress — a far more difficult process (though administratively simpler) than the EPA plan. Nevertheless, the nearly 6-fold difference between their respective CO2 reductions is instructive, illustrating both the narrow scope of the EPA plan and the vast reach of carbon taxing.
Other Key Features of McDermott’s Managed Carbon Price Act:
Dividend: Returns 100% of revenue to individuals as equal (pro rata) “dividends.”
Other greenhouse gases: The five other major GHG’s, including methane, are taxed at their CO2 climate-damage equivalence.
Border Tax Adjustments: HR 4754 would tax the climate pollution of imported goods at the same rate as domestic goods, creating strong and growing incentives for other nations to tax climate pollution while protecting U.S. manufacturers from unfair competition by countries that do not tax climate pollution.
Sanders-Boxer “Climate Protection Act”
On February 14, 2013, Senators Bernie Sanders (I-VT) and Barbara Boxer (D-CA) introduced the Climate Protection Act. Sanders-Boxer would impose an economy-wide tax on CO2 pollution, starting at $20/T CO2 and rising over a decade to $33/T CO2. We estimate that this price signal and trajectory would induce a 12% reduction in CO2 emissions over the course of a decade. The measure includes border tax adjustments to protect domestic industry and encourage other nations to enact their own carbon taxes. Sen. Sanders posted a rousing op-ed in the Huffington Post in July 2014 in support of his and Sen. Boxer’s bill.
The Progressive “Back to Work” Budget
The House Progressive Caucus has also included a carbon tax in its 2014 Better Off Budget proposal. The tax would start at $25/T CO2 and rise 5.6% annually, raising $1.1 trillion in revenue between 2014-2023.
Earlier Carbon Pricing Proposals
Carbon Tax Proposals:
Rep. Stark (D-CA) introduced H.R. 594 “Save Our Climate Act of 2009″ (1/15/09):
A carbon-content tax on fossil fuels starting at $10/ton CO2
Increasing by $10 every year.
Upstream: Fossil fuels taxed they enter the U.S. economy (i.e., at the production or importation level).
Revenue use: not specified.
Exports credited for carbon tax.
Rep. Larson (D-CT) introduced H.R. 1337 “America’s Energy Security Trust Fund Act of 2009″ (3/5/09):
A carbon-content tax on fossil fuels starting at $15/T CO2.
Increasing by $10 each year, but in any year that EPA-identified emission targets (based on reaching 80% below 2005 emissions by 2050) are not met, the tax would increase by $15.
We have estimated the carbon-reducing impact of the Larson bill, using CTC’s 4-Sector Carbon Tax Impact Model. Projected emissions reduction trajectory would meet 80% by 2050.
Upstream (at production or importation).
Revenue use:
1/6 of first year’s revenue for clean energy technology research (funding amount remains fixed at tax rate increases),
1/12 (declining to zero over 10 years) for affected industry transition assistance,
All remaining revenue distributed to individuals. Returns payroll taxes via a federal income tax credit. In the first year, payroll taxes on the first $3,800 of earnings returned; amount of returned revenue rising with the tax rate. Social Security recipients receive a 10% supplement.
Border Adjustments: carbon equivalency fee on carbon-intensive goods imported from non-carbon taxing nations. Exported goods credited for carbon tax.
All revenue used to reduce payroll tax rate. (Contrast with Larson bill which would exempt first ~ $3,800 earned from payroll tax.)
Tax reduction split between employer and employee.
Border Adjustments: equivalent tax on imports, exports credited.
“Managed Market” Proposal
Rep. Doggett (D-TX) introduced H.R. 1666 “Safe Markets Development Act of 2009″ (3/23/09):
Cap-and-trade program to reduce greenhouse gas emissions from covered sources from 6.153 billion metric tons in 2012 to 253 million in 2050.
Treasury to auction 100% of allowances quarterly.
Board (6 members, appointed by President) to set targets for allowance prices, manages quarterly auctions by changing supply of allowances to maintain a smooth price path through 2019, oversees secondary markets (not clear how).
Covered entities may bank up to 5% of allowances from a calendar year.
ACESA included a cap-and-trade title, including 2 billion tons of offsets (up to 75% international) effectively delaying domestic U.S. emissions reductions by at least a decade. The bill would have given away 85% of allowances, auctioning only 15%. (Grist summary here.)
While retaining a “cap” and limited trading, CLEAR would avoid the most profound flaws of the Waxman-Markey bill (passed by the House) and the Kerry-Boxer bill (which stalled in the Senate). CLEAR would set a floor and ceiling (“collar”) on carbon allowance prices, authorize only “covered entities” to hold allowances and would not allow offsets to be used in place of allowances. CLEAR proposed to “recycle” 75% of revenue directly to households, contrasting sharply with the cap-and-trade bills’ give-away of carbon revenue and its equivalent in free allowances to an array of special interests and energy projects. With Sen. Susan Collins’ (R-ME) co-sponsorship, CLEAR began as a bipartisan proposal.
CLEAR purported to preclude a secondary market (or “derivatives”) in carbon allowances. But analysts raised doubts about whether the bill could prevent large energy users from contracting to hedge against seasonal and cyclical price swings. Also, the low price range of bill — $7 to $21 per ton of CO2 in the initial year, 2012, rising each year at approximately 6% above inflation — is not nearly sufficient to achieve the needed emissions reductions. CTC’s Carbon Tax Model suggests that this price trajectory would only lead to a 7.5% drop in U.S. CO2 emissions from 2005 levels in 2020. Instead of a substantial price signal, the bill relied heavily on subsidies for clean-energy investment which would come from the 25% of revenue not returned to households. CLEAR’s goal was emissions reductions of 20% from a 2005 baseline by 2020. CLEAR’s price collar would have made carbon prices more predictable, closer to a carbon tax than other cap-and-trade proposals. But its $7 – 21 range was wide enough to allow significant volatility that could discourage investment in alternatives and efficiency while generating profits for speculators. Potential volatility combined with CLEAR’s low price meant that its price signal would be “noisy” and small — not the clear upwardly trending price signal that would most strongly encourage low-carbon energy.
Finally, a volatile price would have made linkage to international carbon markets (or carbon taxes) needlessly complex or even impossible.
Rep. Van Hollen (D-MD) introduced H.R. 1862 “Cap and Dividend Act of 2009″ (1/1/09):
CO2 Cap. Fossil fuel producers, importers surrender permits for CO2 emissions each year. Permits decline annually, leading to an 85% reduction below 2005 CO2 emissions from covered entities by 2050.
100% auction of permits
Permits tradeable.
Volatility-limiting measures: Unlimited banking. Borrowing if permit prices increase more than 100%.
Revenue use: Funds distributed monthly in equal amounts to those with a social security number.
Washington Gov. Jay Inslee used his June 11 appearance on “Democracy Now” (downloadable MP3) to demand the Democratic National Committee withdraw its threat to exclude from its forums any presidential candidate who participates in non-DNC-sanctioned debates.
Inslee addressed the DNC stance at the start of his 30-minute interview with Democracy Now hosts Amy Goodman and Juan Gonzalez (the segment begins at minute 13:00 of the program). The interview focuses, as does Inslee’s campaign, on climate change but it also ranges across related topics such as immigration, health care and economic development.
Biden climate plan includes a fee on carbon pollution . . . and carbon tariffs
Former V-P and current Democratic front-runner Joe Biden “proposes that Congress pass a law by 2025 to establish some form of price or tax on carbon dioxide pollution, a policy championed by most economists as the most effective way to fight climate change,” the New York Times reported on June 4.
Though Biden did not specify a dollar level for a carbon tax, and a 2025 launch date appears very far off, his climate plan, which goes far beyond a carbon price, was applauded by some activists. “He put out a comprehensive climate plan that cites the Green New Deal and names climate change as the greatest challenge facing America and the world,” Varshini Prakash, executive director of the Sunrise Movement, told the Times. “The pressure worked.”
The Biden plan also includes “carbon tariffs” on imported goods, according to the Times. Such a measure presumes a U.S. carbon tax, since carbon tariffs would be levied on the excess of domestic U.S. carbon taxes relative to other countries’ own carbon price. (For more on carbon tariffs see our Border Adjustments page.)
Dems: 8 out of 18 strongly for taxing carbon emissions
A year and a half out, the 2020 presidential campaign has already paid more attention to climate change than any previous election — perhaps even every previous election combined. (Bill McKibben surveyed the depressing history as part of an election preview for Politico.)
The best news of all is that voters are speaking up. In an April 2019 Monmouth University Poll of Iowa Democrats, climate change ranked second among issues of concern, albeit far behind health care. (Environmental concerns generally also ranked fairly high, which may also reflect climate concern.) The June 4 Times article cited above (re Biden) quoted a Democratic pollster proclaiming, “Climate change is an incredibly important issue for the Democratic base right now. It’s about the future, and it’s something that [President Trump] has made worse in the minds of the Democratic base.”
The candidates — well, the Democrats, anyway — are responding:
A dozen candidates have sworn off campaign contributions from fossil-fuel companies, according to Oil Change International (see graphic).
Most importantly, a number of candidates — Beto O’Rourke, Jay Inslee, Elizabeth Warren and, now, Joe Biden have rolled out serious, detailed climate programs. (See below for coverage of these proposals.)
The dozen candidates shown above have pledged to campaign free of fossil fuel contributions, according to Oil Change International
Only three candidates have explicitly endorsed a carbon tax, however. Aside from Biden, Former Maryland representative John Delaney was an original cosponsor of the Energy Innovation and Carbon Dividend Act of 2018, which largely followed Citizens’ Climate Lobby’s fee-and-dividend template. And South Bend, Indiana, mayor Pete Buttigieg made an articulate case for the same approach in an appearance on the Tonight Show (beginning at 6:15):
There’s also a plan called a carbon tax and dividend. Basically you set a price on things that put carbon into the atmosphere, but then you can rebate that back out to the American people so most of us would actually be better off if we did it. Meanwhile it would help change the economic incentives so that you’d see less activity that hurts the environment. Because the true cost is not reflected in the price of, for example, energy that comes from coal. If you were facing the true cost of it you’d have to set that price a lot higher.
Most of the field has been tiptoeing around the issue, perhaps fearing, in the words of New York Times columnist David Leonhardt, that carbon taxes “focus people’s attention on the short-terms costs of moving away from dirty energy” instead of on the benefits of clean energy.
But if they aren’t running on carbon pricing, at least some of the candidates aren’t running away from it, either. In April 2019, when the Times surveyed the announced Democratic candidates (18 at the time) on climate change, it found seven who “put their weight firmly behind a carbon tax”: Cory Booker, Pete Buttigieg, Julián Castro, John Delaney, Kirsten Gillibrand, Marianne Williamson and Andrew Yang. (Presumably, Biden has joined the ranks.)
Five others said they were “willing to consider” a carbon tax, according to the Times: Jay Inslee, Amy Klobuchar, Beto O’Rourke, Tim Ryan, Eric Swalwell.
In May 2019, Citizens Climate Lobby posted a more detailed survey, Which 2020 candidates support carbon pricing?, with thumbnails of eight Democratic candidates as well as two possible Republican challengers to President Trump.
Sanders is said to “demote” carbon taxing
A Climatewire story in early June examined the reticence of climate hawk and erstwhile carbon tax proponent Sen. Bernie Sanders to express support for carbon taxing in 2019. Though the story, Sanders demotes carbon taxes. Here’s what it means for Dems, leads with the Vermont senator, it finds a similar reluctance across much of the Democratic field.
First, about Sanders:
His [Sanders’] 2020 presidential campaign still focuses on global warming, but gone are the regular broadsides over carbon pricing. Missing, too, is any reference to carbon taxes in the climate section of his official campaign website. Instead, Sanders has chosen to emphasize the Green New Deal when talking about climate change — a shift that underscores how much the politics of global warming have transformed in a few short years. Part of that, perhaps, is a broader decline in enthusiasm for carbon pricing among left-leaning politicians and activists.
Climatewire also notes:
Sanders’ shift in focus is striking. During the 2016 campaign, Sanders repeatedly hammered Clinton over her unwillingness to get behind a tax on carbon emissions. “I would ask you to respond. Are you in favor of a tax on carbon?” he asked in one debate. Later — after Clinton had sewn up the Democratic nomination — Sanders pressed to include carbon taxes in the party’s 2016 platform in part by appointing longtime environmentalist Bill McKibben to the drafting committee.
The Climatewire story concludes with a curious but revealing quote from an advisor to Congressmember and Green New Deal spearhead Alexandria Ocasio-Cortez. “I feel we’re very locked into what we can do when we lead with a carbon tax,” says Andrés Bernal. The operative word is “lead,” as the story implies by noting that Bernal’s statement “doesn’t mean [he] doesn’t see carbon taxes as part of the equation at some point.”
Even so, any “lock-in” would be in the realm of politics, not policy. A carbon tax was never going to be a stand-alone, but rather both a market-pulling force and a pay-for, as this site has pointed out practically since its founding in early 2007, most recently in the April post by CTC policy associate Bob Narus, Green New Dealers Should Embrace a Carbon Tax.
Beto O’Rourke
On April 29, former Texas representative Beto O’Rourke surprised everyone by being first out of the Democratic gate with a comprehensive climate policy. His four-part plan includes:
Immediate executive and regulatory actions ranging from controlling methane leakage and building efficiency standards to “clean” government procurement
$1.5 trillion in spending (paid for by taxes on the wealthy and corporations), leveraging an additional $3.5 trillion in non-government spending, on clean energy investments and R&D
A 2050 target date for net-zero emissions
Efforts to protect communities, agriculture and military installations from the impacts of climate change
O’Rourke doesn’t use the term “carbon tax,” but he does promise a “legally enforceable standard” for meeting the 2050 deadline, explaining:
This standard will send a clear price signal to the market to change the incentives for how we produce, consume, and invest in energy, while putting in place a mechanism that will ensure the environmental and socio-economic integrity of this endeavor — providing us with the confidence that we are moving at least as quickly as we need in order to meet a 2050 deadline.
That language seems to envision some form of carbon pricing.
Jay Inslee
On May 3, Washington Governor Jay Inslee released his “100% Clean Energy for America Plan” in several media (video, Web page, 8-page pdf). Carbon pricing isn’t mentioned. Excerpts from the Inslee campaign’s Web page:
Governor Jay Inslee’s 100% Clean Energy for America Plan will achieve 100% clean electricity, 100% zero-emission new vehicles and 100% zero-carbon new buildings. This plan will empower America to make the entire electrical grid and every new car and building climate pollution-free, at the speed that science and public health demand.
The 100% Clean Energy for America Plan is the first major policy announcement in Governor Inslee’s Climate Mission agenda – a bold 10-year mobilization to defeat climate change and create millions of good-paying jobs building a just, innovative and inclusive clean energy future, with meaningful targets and plans for execution based on his experience as a governor. Governor Inslee will announce additional major planks of his detailed climate plan in the coming weeks.
Two weeks later came Phase 2 — Inslee’s Evergreen Economy Plan. The 38-page plan defies easy summarization, but highlights include:
a Rebuild America Initiative to upgrade buildings
a $90 billion green bank to support clean energy projects
a $3 trillion infrastructure program
a clean manufacturing program, including federal procurement standards
greatly expanded clean-energy R&D
higher wages, benefits and union rights for clean-energy workers
All told, Inslee proposes spending $300 billion per year, leveraging another $600 billion in private investment , for a total of $9 trillion over a decade. No word yet on where he plans to get that $300 billion/year. “I have plans,” he told us at a Manhattan meet-and-greet the same day he released the proposal.
To put it bluntly, Inslee is writing a Green New Deal. . . . This isn’t just a campaign play, it’s a document the next Democratic president is going to want in-hand when the time comes to get to work.
Alexander Kaufman at Huffington Post also has a good summary of Inslee’s plan.
Federal regulations over the past half-century have wrought impressive improvements in U.S. air and water quality. In particular, the 1970 Clean Air Act and its 1977 and 1990 amendments have significantly reduced concentrations of particulates, nitrogen and sulfur oxides, and other harmful pollutants in “ambient air” in almost every part of the United States.
Much of this improvement has come about from “technology forcing,” as regulations limiting permissible emissions — for example, in pounds of pollution per kilowatt-hour generated — led electric utility companies to test, procure and install pollution-control devices that drastically cut soot and acid rain emissions from coal-fired power plant smokestacks.
These and similar successes have led many climate advocates to urge similar regulatory pathways to curb carbon emissions. Another consideration is that unlike carbon taxes, whose pass-through to the consumer level would be highly visible, regulations appear to target only big-business corporations, making them broadly popular among the public and, thus, to politicians.
Nevertheless, regulatory approaches may offer only modest prospects for controlling and reducing emissions of carbon dioxide and other greenhouse gases, for several reasons. For one thing, the absence of antipollution devices for capturing or lowering CO2 emissions limits the scope of technology-forcing regulation. For another, promulgation of regulations is necessarily piecemeal and reactive. Moreover, the regulation-setting and administering process itself is cumbersome, delay-prone and subject to legal challenge by carbon interests.
Legal and Administrative Pitfalls that May Confront Climate Regulation
By Jonathan H. Adler
Key Takeaways
Greenhouse gas regulations may be vulnerable to legal attacks, state resistance, and administrative delays that will compromise their ability to produce rapid reductions in emissions.
Climate regulations will be particularly vulnerable insofar as they are not clearly authorized by legislation.
Adopting new regulations can be a long, drawn-out process and agencies routinely miss legal deadlines even when regulatory policies are clearly authorized by statutes.
Because the administrative process is cumbersome, prone to delay, and subject to judicial review, nonregulatory measures may be a more rapid and secure way to reduce GHG emissions.
A carbon tax would be less vulnerable to administrative delays and legal challenges than comparable emission-control regulations.
The ink on the Patient Protection and Affordable Care Act was scarcely dry before the legal assault on health care reform began. The first state lawsuit, which would eventually reach the Supreme Court, was literally filed the very same day President Barack Obama signed the PPACA into law, and additional lawsuits soon followed.
Meaningful climate policies are certain to come under equally aggressive legal attack. Indeed, some opponents of the Obama administration’s climate initiatives sought to challenge the Environmental Protection Agency’s Clean Power Plan before it had even been promulgated.
There is a mismatch between the stated urgency of the problem and the focus on federal regulation as the dominant climate policy tool. Environmental advocates and the Biden administration are committed to urgent action on climate change, as dramatic and rapid reductions in greenhouse gases are necessary to meet the administration’s long-term targets and to ultimately stabilize atmospheric concentrations of greenhouse gases (GHGs) at acceptable levels. Yet some potential paths forward entail significant practical obstacles and legal risks, particularly if the aim is to achieve emission reductions quickly.
Prioritizing regulatory measures over fiscal instruments may be a strategic mistake. Regulatory mandates, particularly if based upon existing statutory authority, will be vulnerable to legal attack, obstruction, and delay. Even in the best of times, the control of GHG emissions through federal regulation would be a long and cumbersome process, requiring dozens of complex rulemakings. Yet these are not the best of times. Federal agencies, the EPA in particular, are depleted of personnel and expertise. At the same time, a phalanx of economic and ideological interests stands ready to challenge every climate policy initiative. A potentially hostile judiciary will further complicate efforts to make federal regulation a central component of carbon control.
Enactment of climate legislation expressly authorizing federal regulation of GHG emissions and other regulatory efforts to reduce the carbon intensity of the American economy can reduce the legal risks and accelerate the rate at which such policies can be adopted and implemented, but only on the margin. Adopting regulatory controls, sector-by-sector, technology-by-technology will be immensely resource intensive for the EPA and other federal agencies. Even with authorizing legislation, federal regulatory strategies may remain more time-consuming, conflict-ridden, and legally vulnerable than fiscal measures. A carbon tax, in particular, would be more legally secure and administratively easier to implement than regulatory controls on energy use and GHG emissions. In all likelihood, a nationwide carbon tax could be implemented in less time, and with less legal and administrative wrangling, than a single, sector-specific GHG emission standard.
Any meaningful climate policy will face concerted opposition. If climate policy is to be effective, the fact of such opposition, and its potential to delay and derail implementation, must be taken into account. It is often said that the perfect policy should not be the enemy of the good. It is equally true that a good policy that cannot be implemented as planned is not so good after all. If the aim is to adopt climate policy measures that are capable of reducing GHG emissions quickly and sustainably, this analysis suggests a carbon tax and federal spending initiatives are more promising than federal regulatory measures.
This paper surveys the legal vulnerabilities and administrative obstacles to the rapid adoption of regulatory measures capable of achieving meaningful GHG reductions. This analysis does not purport to identify which climate policies would be the most effective in the abstract, or in the absence of administrative and legal constraints. Nor does this paper make any claims about what sorts of measures can pass Congress now or in the future. Rather, this analysis seeks to inform the choice of climate strategies by highlighting the risks faced by climate measures once they are enacted by Congress or promulgated by federal regulatory agencies.
Demand price-elasticity denotes the extent to which rises in price engender a drop in demand. A price-elasticity of 50% means that the drop in demand is half as steep as the price rise. Thus, a 2% increase in price would be required to engender a 1% decrease in demand. Importantly, for large price increases such as we propose over time, the drops in demand would be proportionately less, reflecting the law of diminishing returns. And at the same time the phased-in tax is causing prices of fossil fuels to rise, incomes would be rising, offsetting some of the reductions.
We agree with pioneering climate-scientist 
Other results from the 2016 Gallup poll are equally striking. They show a record-high share of Americans stating that climate change poses a threat to them and their way of life; a record number agreeing that climate change is caused primarily by human activity; and climate concern climbing across the political spectrum.
