Frequently Asked Questions and Answers about Carbon Taxes and the Carbon Tax Center

1. Who/what is the Carbon Tax Center?

The Carbon Tax Center (“CTC”) was launched in January 2007 to give voice to Americans who believe that taxing carbon dioxide 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’s mission is to educate and inform policymakers, opinion leaders and the public, including grassroots organizations, about the benefits of and critical need for significant, rising and equitable taxes on carbon emissions from fossil fuels. Though Dan has moved on, Charles remains as CTC director, while James Handley serves as our senior policy analyst in Washington D.C.

2. Why are carbon taxes essential?

Charging businesses and individuals a rising price for carbon dioxide (CO2) pollution is essential to reduce U.S. emissions quickly and steeply enough to prevent atmospheric concentrations of CO2 from reaching an irreversible tipping point. The transformation of our fossil fuels-based energy system to reliance on energy efficiency, renewable energy and sustainable fuels won’t happen 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, as Brookings economist (and carbon tax supporter) Adele Morris is wont to say, “As long as burning dirt (i.e., fossil fuels) is the cheapest form of energy, that’s what we’ll do.”

3. How serious is the climate crisis?

We agree with Al Gore and scientists such as Sir David King and James Hansen that the continued buildup of greenhouse gases in Earth’s atmosphere portends worldwide cataclysmic change in the very near future. Denialists’ claims that global temperatures are receding are just hot air; figures on global climate reported by the New York Times in January 2011 show that 2010 tied 2005 as the hottest year on record, and that the decade just ended (2001-2010) had all but one of the ten warmest years ever. And 2012 was the hottest year on record. But sweltering summers are the least of what’s in store for humanity. Destructive storms, inundation of coastal regions, decimation of 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 federal 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, around 2008. Nevertheless, the U.S. still accounts for around 20% of the world’s CO2 emissions from fuel-burning. Because fewer than 5% of the world’s people are Americans, per capita we emit almost 5 times as much CO2 as the average non-American. Historically, the disparity is even greater; and because carbon dioxide molecules persist in Earth’s atmosphere for around a century, our past emissions are disproportionately responsible for causing 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 recommend carbon tax shifting?

To avoid burdening the less affluent, carbon tax proceeds should be returned to Americans through periodic pro rata “dividends” or dedicated to 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 into the atmosphere while simultaneously promoting tax equity and minimizing the impact of the carbon tax on those with lower incomes.

7. Why does CTC recommend carbon taxes in addition to 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. But standard-setting takes a long time, and standards tend to be static whereas energy use is ever-evolving. Carbon taxes combined with efficiency standards will achieve far more than the latter alone by encouraging 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 incentives that pay wind and solar generators for each kWh produced, and state “Renewable Portfolio (or Energy) Standards” that mandate increased use of renewable power, have been and will be instrumental in jump-starting these essential sectors. But just as vital as renewable energy is energy efficiency, and for that subsidies are impracticable due to the distributed and dispersed nature of energy efficiency investments and choices. Moreover, a carbon tax will provide a strong impetus for wind and solar power as well to speed their rise from their 1-2% niche to a majority share of U.S. energy.

9. Why not just withdraw fossil fuel subsidies?

Good reasons abound for zeroing out tax breaks, lease loopholes and other giveaways to the fossil fuel industry. But the impact on U.S. fossil fuel use would barely be noticeable. Authoritative sources such as EarthTrack place the 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. 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?

We first wrote this paragraph in 2007, when the average U.S. pump price was nearly $3 a gallon and talk of “peak oil” was the vogue. Now (Dec. 2014), gas prices are practically in free fall, natural gas is near record lows, and the price of electricity is struggling to keep up with inflation. So much for “market forces.” In general, 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 of the energy industry and ravage the poor and middle class. They’re even counter-productive, since high prices, absent a carbon tax, exacerbate global warming by unleashing production of costly and CO2-intensive “extreme” fossil fuels from tar sands, mountaintop detonation, and fracking. Only carbon taxes can provide the right combination of market correctives and protection of American families and our environment.

11. Why not let technology remove carbon pollution from coal-fired smokestacks?

The Carbon Tax Center doesn’t take positions on competing technologies; we focus our advocacy on remedying the market failure that allows burning of gas, oil and especially 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 the generating capacity and coal throughput that would be required to process the flue gas so as to safely remove 90% or more of the CO2. (Richard Heinberg of the Post Carbon Institute published a concise and compelling summary of this and other cost and logistical issues with CCS in the Wall Street Journal in late 2014.) In any event, every serious carbon tax bill includes provisions 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 42% of U.S. CO2 emissions from burning fuels (coal and natural gas are responsible for 36% and 22%, 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 eliminated by allocating the tax revenues to benefit the less affluent. The key fact 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. Most carbon tax revenues will come from families of above-average means, corporations and government, 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 annually sends 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 would get more back in rebates or tax savings than they would pay in the carbon tax. The Citizens Climate Lobby is the leading (and increasingly visible) 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 were distributed as per capita “dividends,” that family would receive $1,000. If that family used less fossil fuel energy than average, their increased costs would be less than $1,000, so they’d come out ahead.) Successive annual carbon tax increments adding $12.50 per ton would add to the annual revenue stream, though at a declining rate as CO2 emissions fell each year in response to the rising CO2 price. By the end of the tenth year, the annual revenue would 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. For example, 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 would 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 would be taxed. Gilbert Metcalf and David Weisbach offer more detail in The Design of a Carbon Tax (Harvard Environmental Law Rev, 2009).

17. 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.

18. 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.

19. 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 is no magic formula or right 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, 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.

20. 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 would 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.

21. 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
  • 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
  • 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
  • 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.

22. 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 rises in fossil fuel prices can be expected to 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.

23. 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.

24. What are the ancillary benefits of taxing carbon?

As the previous Q&A suggests, U.S. carbon taxes will usher in a host of non-climate benefits by discouraging use of fossil fuels. These benefits will range from better air quality and less strip-mining to reduced entanglement in the unstable and dangerous Middle East. Americans could 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.

25. 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.

26. How have past fuel tax efforts fared in the U.S.?

Poorly. The idea of taxing energy to reflect its true costs runs smack against both Americans’ traditional sense of entitlement to cheap energy and the anti-tax ideology of the past quarter-century or more. This cheap-energy entitlement helped kill the last two big efforts to tax energy — President Clinton’s Btu tax in 1993 and Rep. John Anderson’s “50/50″ program in the 1980 elections. Nevertheless, we’re banking on the idea that a revenue-neutral carbon tax, with the 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 rising support for a tax designed to combat climate change.

27. What does polling indicate about carbon taxes?

Opinion polls increasingly find Americans grasping the need to pay more for energy to address climate change. Polling of 1,008 adults by Yale and George Mason University’s Center for Climate Change Communication (March 2012) found that 61 percent of Americans support holding the fossil fuel industry (coal, oil and natural gas) responsible for “all the hidden costs we pay for citizens who get sick from polluted air and water, military costs to maintain our access to foreign oil, and the environmental costs of spills and accidents.” In the most recent (July 2014) National Survey on Energy and Environment by researchers at the University of Michigan, a revenue-neutral carbon tax received 56% support. (You can read more about the U-Mich poll in our blog post, A Breatkthrough in Polling on a U.S. Carbon Tax; and there’s a trove of information and links on our page on opinion polling.)

28. What will a carbon tax look like to me?

On the one hand, just about everything requiring fossil fuels, from a drive in the country to produce imported from South America, 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 other non-fossil sources); 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.

29. Who’s taxing carbon now?

The best quick source is probably the November (2014) report from Sightline Institute, All the World’s Carbon Pricing Systems in One Animated Map. In a series of maps it traces 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. Caveat: prospective carbon tax programs, i.e., after 2014, should be viewed cautiously.

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/ton in effect since 2012. 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.

30. 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.

31. 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. Sign our pledge (“I support a carbon tax for a livable future”) at the top of our Home Page, or subscribe by clicking this link (or the same link just below the SIGN PLEDGE button just mentioned). 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, which you can do quickly by clicking our DONATE NOW button (easy) or, if you want more options, going to our Contact page. It’s because of contributions from people like you that we’re able to conduct research, work on advocacy, and share knowledge and hope on carbon taxing. Thank you.


Last modified: September 1, 2015