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 Washington D.C. rep.

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 likes 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. Hotter 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?

Based on 2008 data, the U.S. has slipped behind China as the world’s largest emitter of carbon dioxide, the principal greenhouse gas. 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 advocate carbon tax shifting?

To avoid burdening the less affluent, carbon tax proceeds should be returned to Americans through an equal, pro rata rebate 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 advocate carbon taxes in addition to energy-efficiency standards?

Energy standards have improved energy performance by forcing product design changes in a few important sectors, principally major home appliances and U.S.-made automobiles. But standard-setting takes a long time, and standards alone 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 pro-actively maximize energy efficiency while giving consumers ongoing incentives to make cost-effective choices valuing efficiency in purchasing, traveling and daily behavior.

8. Why not just subsidize renewables instead?

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. Ditto, going forward, for biofuels. Still, the cost hurdles for renewables remain high. Taxing fossil fuels for their damage to climate is the best way to help renewables grow 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. The impact on fossil fuel use, however, 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 (like peak oil) lift fuel prices?

Market signals are too volatile in the short term and too weak in the long term to provide the effective 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, would line the pockets of the energy industry and ravage the poor and middle class. They would also be counter-productive, since high prices, absent a carbon tax, would exacerbate global warming by unleashing production of costly and CO2-intensive fuels from “unconventional” sources such as Canada’s oil sands. Only carbon taxes can provide the right combination of market correctives and protection of American families and our environment.

11. Will a carbon tax lessen U.S. oil dependence?

You bet it will. 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.

12. 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.

13. 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)

14. 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. This equates to $0.15/gallon of gasoline. (Coal’s greater carbon content would result in higher levy, while the lower carbon content of natural gas would result in a lower tax per unit of energy.) That $15 per ton CO2 tax would bring in revenue of roughly $81 billion a year. This equates to around $270 per U.S. resident, or $1080 for a family of four. (Thus, if carbon revenue were distributed as per capita “dividends,” that family would receive $1080. If that family used less fossil fuel energy than average, their increased costs would be less than $1080, so they’d come out ahead.) Successive annual carbon tax increments adding $12.50 per ton would add to the annual revenue stream (at a declining rate as CO2 emissions fall each year in response to a rising CO2 price). By the end of the tenth year, the annual revenue would be on the order of $511 billion. We estimate that brisk rise in the cost of CO2 pollution will reduce U.S. emissions dramatically, by about 1/3.

15. How will carbon taxes be administered?

The tax will be levied in the wholesale branch of the fuel supply chain, as far upstream as practicable. For example, electric generators will pay the mandated carbon tax to their coal, oil 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.

16. How will carbon taxes handle carbon sequestration? Plastics? Petrochemicals?

Offsetting credit will be provided to the extent the carbon dioxide is subsequently 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.

17. 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, but 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.

18. 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 15 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 or Prius?) to home-buying (exurb or transit-oriented community?) to factory locating (highway interchange or rail line?), are made with carbon-appropriate price signals.

19. Must carbon taxes be global to work?

A carbon tax can be applied locally, nationally or globally. A global carbon tax is the goal, not just because the climate crisis is global but because it would avert potential leakage by carbon emitters attempting to move their combustion of carbon from jurisdictions that tax carbon to those that do not. 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. It is essential, however; that we not make perfection the enemy of the good, and that carbon be taxed wherever possible until a global tax is implemented.

20. Why a carbon tax instead of a cap-and-trade system?

Carbon taxes are superior to cap-and-trade programs for six fundamental reasons:

  • Carbon taxes will lend predictability to energy prices, whereas
    cap-and-trade systems will do little to mitigate the price volatility
    that historically has discouraged investments in less carbon-intensive
    electricity generation, carbon-reducing energy efficiency and
    carbon-replacing renewable energy.
  • Carbon taxes can be implemented much sooner than complex
    cap-and-trade systems. Because of the urgency of the climate crisis, we
    do not have the luxury of waiting while the myriad details of a
    cap-and-trade system are resolved through lengthy negotiations.
  • Carbon taxes are transparent and easily understandable, making them
    more likely to elicit the necessary public support than an opaque and
    difficult to understand cap-and-trade system.
  • Carbon taxes can be implemented with far less opportunity for
    manipulation by special interests, while a cap-and-trade system’s
    complexity opens it to exploitation by special interests and perverse
    incentives that can undermine public confidence and undercut its
  • Carbon taxes address emissions of carbon from every sector, whereas
    cap-and-trade systems discussed to date have only targeted the
    electricity industry, which accounts for less than 40% of emissions.
  • Carbon tax revenues can be returned to the public through
    progressive tax-shifting, while the costs of cap-and-trade systems are
    likely to become a hidden tax as dollars flow to market participants,
    lawyers and consultants.

21. 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 accounts for 22.9% of U.S. emissions of carbon dioxide) and electricity (39.5% of CO2).  From our literature review, CTC believes a “price-elasticity” of 40% (or negative 0.4, 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 fuel price but are still substantial. For all other fuel uses — a huge catch-all category (37.6% of CO2) that ranges 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 here.)

These estimates are “long-run” elasticities, meaning that price rises may take years to fully affect demand. That’s because 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.

Pending further analysis, CTC believes it is reasonable to associate a 4% drop in carbon dioxide emissions with each year’s ramp-up of our proposed $37/ton (of carbon) charge. While the impacts of repeated annual iterations of this charge would be less, due to the law of diminishing returns, this shrinkage would tend to be offset by carbon reductions contributed from the supply side.

22. What are the non-climate costs of using fossil fuels?

Fossil fuels impose a multitude of environmental and social costs apart from destabilizing climate. Chief among them are “traditional” air pollution such as car and truck exhaust and smokestack emissions; damage to land and water from extracting and transporting fuels; and the militarism, income inequality and political authoritarianism that is evidently endemic to extractive economies (e.g., Saudi Arabia, Nigeria, Indonesia). Many researchers believe that these and other “indirect” costs exceed the “market” prices paid for coal, oil and gas.

23. What are the ancillary benefits of taxing carbon?

As the previous Q&A suggests, U.S. carbon taxes could be expected to usher in a host of non-climate benefits, 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.

24. Who favors carbon taxes?

Carbon taxes are supported by a diverse group of opinion leaders, pundits (including a majority of the New York Times’ seven regular columnists, two of whom lean to the right, politically) 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 coal and oil companies that fear the loss of sales – which is precisely what a carbon tax should accomplish.

25. 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. 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 – which helps explain why no prominent elected official has yet endorsed raising taxes on energy. Progressive tax-shifting or a rebate of carbon tax revenues should dramatically reduce resistance to the idea of a tax and, as described in the response to the next FAQ, polls demonstrate significant support for a tax designed to reduce global warming.

26. What do polls indicate about carbon taxes?

Recent polls indicate that Americans are coming to recognize the need to pay more for energy in order to combat global warming. 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.” By a margin of 3 to 1, Americans say they would be more likely to vote for a political candidate who supports a “revenue neutral” tax shift. This shift would increase taxes on coal, oil and natural gas, and reduce the federal income tax by an equal amount, while creating jobs and decreasing pollution. 61 percent of Americans say they would be more likely to vote for a candidate who supports such a tax shift, while 20 percent say they would be less likely. Among registered voters, Republicans would be more likely to vote for a candidate who supports such a tax shift by a 2 to 1 margin.

27. 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 rebate or reduction 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, choosing 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.

28. Who’s taxing carbon now?

Sweden introduced a carbon tax in 1991, and other European countries – Finland, Norway, the Netherlands — followed suit. Ironically, the Kyoto Accords halted further enactment by individual countries, but the recent upsurge of climate concern has brought a resurgence of interest in taxing carbon. The 25-member European Union, representing nearly half-a-billion people, recently voted a carbon tax of $13/ton to be inaugurated during 2006-07, increasing to $33/ton during 2008-12. Japan has mandated a “household energy tax” equivalent to $21/ton of carbon, and British Columbia began taxing carbon emissions on July 1, 2008 and have briskly raised the carbon tax annually, returning revenue via a range of popular tax cuts. 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.

29. What’s your political strategy for winning carbon taxes?

An effective campaign approach to carbon taxes must be both intellectually sound and politically palatable. The key is to steer around the pitfall of having a tax on carbon pollution framed as yet another way to raise taxes; the secret is a clear insistence on returning revenues from carbon taxes to provide rebates to all U.S. residents or to reduce existing regressive taxes (dubbed “progressive tax-shifting”). This carbon tax-shift will reduce the tax burden from regressive taxes such as federal payroll taxes as Rep. John Larson has proposed, or sales taxes (at the state level) and properly place it on pollution and pollution-generating activities. This will aid in framing carbon taxes as an embodiment of the “polluter pays” principle that can unite interests as diverse as environmental-justice advocates and classical economists. It will also ensure that people of limited means, who use less energy than average, are made better off, not worse, with carbon taxing.

30. 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 carbon tax at your local environmental, religious or civic group meetings. Subscribe on our home page so we can keep you informed and visit this site often. We’ll keep it up to date and worth your time. Please ask us for help if you need further information (write to [email protected]). And please donate to the Carbon Tax Center. It’s contributions from people like you that enable us to conduct research, work on advocacy, and spread the word about the need for and advantages of carbon taxes. Thank you.

Last modified: June 12, 2014