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This is one of half-a-dozen pages compiling expressions of support for carbon taxes (or more targeted taxes, e.g., on gasoline) by notable individuals and organizations. To access other pages with different supporter categories, click on the Progress link on the navigation bar and move to the desired category.

Economists comprise the most vocal — even vociferous — community of carbon-tax supporters. This is unsurprising, insofar as “one of the first principles of economics — perhaps the most important — is that people respond to incentives,” and a carbon tax is the embodiment of incentives, provided its level is sufficiently robust.

The quote above is taken from Harvard economics professor Greg Mankiw, whom we designate below as one of the two most persistent and persuasive pro-carbon-tax economists. The other is Cornell economics professor Robert H. Frank.

We begin by referencing the 68-page Report of the High-Level Commission on Carbon Prices composed by a 13-member council of luminaries supported by the Carbon Pricing Leadership Coalition and published in May 2017 by the World Bank.

The 13-member council was chaired by Nobel Laureate Joseph Stiglitz (U.S.) and Lord Nicholas Stern (U.K.) and was drawn from seven other countries as well: Brazil, France, China, India, Indonesia, Mali and South Africa.

The report “identif[ied] the range of carbon prices that, together with other supportive policies, would deliver on the Paris climate targets agreed by nearly 200 countries in December 2015,” according to the council’s press release, which was issued under the title, Leading Economists: A Strong Carbon Price Needed to Drive Large-Scale Climate Action. It found that “meeting the world’s agreed climate goals in the most cost-effective way while fostering growth requires countries to set a strong carbon price, with the goal of reaching $40-$80 per metric ton of CO2 by 2020 and $50-100 per metric ton by 2030.”

The report stated that “a well-designed carbon price is an indispensable part of a strategy for efficiently reducing greenhouse gas emissions while also fostering growth [and] that a strong and predictable carbon-price trajectory provides a powerful signal to individuals and firms that the future is low carbon, inducing the changes needed in global investment, production, and consumption patterns.”

“Specific carbon price levels will need to be tailored to country conditions and policy choices,” said Commission member, Professor Harald Winkler of the University of Cape Town, South Africa. “Carbon pricing makes sense in all countries, but low-income countries, which may be more challenged to protect the people vulnerable to the initial economic impacts, may decide to start pricing carbon at a lower level and gradually increase over time.”

Other broad expressions of economists’ support for carbon taxing

In an April 1, 2012 column in The New York Times, Prof. Richard H. Thaler of the U-Chicago Booth School of Business aptly summed up the near-unanimity among economists that carbon taxing is the optimal way to reduce CO2 emissions: “Consider a recent poll of a panel of economists conducted by the University of Chicago Booth School of Business, where I teach… [Forty-one] economists in [a poll conducted by the] University of Chicago … were asked whether they agreed with this statement: ‘A tax on the carbon content of fuels would be a less expensive way to reduce carbon-dioxide emissions than would a collection of policies such as ‘corporate average fuel economy’ requirements for automobiles.’ On this question, there was just a single negative vote.” (Why Gas Prices Are Out of Any President’s Control).

In 2011, The Economist asked, Do All Economists Favour a Carbon Tax?

Carbon emissions represent a negative externality. When an individual takes an economic action with some fossil-fuel energy content—whether running a petrol-powered lawnmower, turning on a light, or buying bunch of grapes—that person balances their personal benefits against the costs of the action. The cost to them of the climate change resulting from the carbon content of that decisions, however, is effectively zero and is rationally ignored. The decision to ignore carbon content, when aggregated over the whole of humanity, generates huge carbon dioxide emissions and rising global temperatures.

The economic solution is to tax the externality so that the social cost of carbon is reflected in the individual consumer’s decision. The carbon tax is an elegant solution to a complicated problem, which allows the everyday business of consumer decision making to do the work of emission reduction. It’s by no means the only economically sensible policy response to the threat of climate change, but it is the one we’d expect economists to embrace.

Economists overwhelmingly support a well-designed national carbon tax. In 2012, a University of Chicago survey asked 40 prominent economists from across the political spectrum whether they would prefer the government to raise revenue through traditional income taxes or via a national carbon tax. Not one chose the income tax approach.

Finally, we have: A majority of economists polled by the Wall Street Journal during Feb. 2-7, 2007:

The government should encourage development of alternatives to fossil fuels, economists said in a WSJ.com survey. But most say the best way to do that isn’t in President Bush’s energy proposals: a new tax on fossil fuels. Forty of 47 economists who answered the question said the government should help champion alternative fuels. “Economists generally are in favor of free-market solutions, but there are times when you need to intervene,” said David Wyss at Standard & Poor’s Corp. “We’re already in the danger zone” because of the outlook for oil supplies and concerns about climate change, he said. A majority of the economists said a tax on fossil fuels would be the most economically sound way to encourage alternatives. A tax would raise the price of fossil fuels and make alternatives, which today often are more costly to produce, more competitive in the consumer market. “A tax puts pressure on the market, rather than forcing an artificial solution on it,” said Mr. Wyss. (WSJ, Is It Time for a New Tax on Energy?, Feb. 8, 2007; the foregoing text is lifted directly from the article.)

Two standout pro-carbon-tax economists: Greg Mankiw and Bob Frank

Two Ivy League university economics professors occupying somewhat opposing positions on the usual left-right spectrum are arguably their profession’s most ubiquitous advocates for taxing carbon emissions.

Gregory Mankiw (Harvard), a proud centrist (or right-of-centrist), is a distinguished pedagogue and political adviser. He chaired President George W. Bush’s Council of Economic Advisers (2003-2005) and was senior economic advisor to the 2012 Romney for President campaign.

Robert H. Frank (Cornell), author of The Winner-Take-All Society and The Darwin Economy, and, in 2020, Under the Influence: Putting Peer Pressure to Work ranks with Mankiw in his unceasing and imaginative advocacy of carbon and other “Pigovian” taxes. He also carries on Thorstein Veblen’s critique of “conspicuous consumption,” framing it as an argument for sharply higher taxes on wealth.

Mankiw

In a Sept 2020 column in the NY Times Sunday business section, Pay People to Get Vaccinated, Mankiw used carbon taxing as a template to support the proposal by Brookings Institution economist Bob Litan for the U.S. government to achieve high Coronavirus vaccination rates by paying Americans to take a prospective vaccine. Mankiw wrote:

Immunology, meet economics. One of the first principles of economics — perhaps the most important — is that people respond to incentives. Applying this principle to the case at hand, Mr. Litan recommends that the government pay $1,000 to whoever gets the vaccine. With a large enough incentive, most Americans are likely to get vaccinated.

This proposal is textbook economics. (I’ve written some of the textbooks.) As all economics students learn, when an activity has a side effect on bystanders, that effect is called an externality. In the presence of externalities, the famous theorems of economics that justify laissez-faire do not apply. Adam Smith’s vaunted invisible hand can no longer work its magic.

A classic example of a negative externality is pollution, and the simplest and least invasive policy solution is a tax on emissions. In economics-speak, such a tax internalizes the externality: It induces polluters to take the cost of pollution into account by giving them a financial incentive to cut emissions. That’s why I have written here many times that a tax on carbon emissions is the best way to deal with global climate change.

Vaccination confers a positive externality. When you get vaccinated, you benefit not only yourself but also your fellow citizens by helping society take a step toward herd immunity. In this case, internalizing the externality requires not a tax but a subsidy, as Mr. Litan suggests.

(emphases added)

In late 2012, Mankiw wrote in a NY Times op-ed, Wishful Thinking and Middle-Class Taxes (Dec. 29, 2012):

Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans. This could involve higher tax rates or an elimination of popular deductions. Or it could mean an entirely new tax, such as a value-added tax or a carbon tax. (emphasis added)

While that was only a mild endorsement of a carbon tax, the timing was noteworthy, coming in the late stages of the “fiscal cliff” negotiations and less than two months after Romney’s defeat in an election campaign in which he had belittled concerns over climate disruption.

Years earlier, Mankiw powerfully made the case for a carbon tax in an op-ed, One Answer to Global Warming, in the Sept. 16, 2007 NY Times Sunday Business Section (see our blog for excerpts and discussion). His 2006 Wall Street Journal op-ed pieces (Jan. 3 and Oct. 20) are among the many lively pieces available on Mankiw’s pro-fuel-tax blog, The Pigou Club Manifesto. (Economist Arthur Pigou, 1877-1959, developed the concept of economic externalities along with corrective “Pigovian” taxes.) On the last day of 2006 Mankiw reiterated his 2006 New Year’s Resolutions from his Jan. 3, 2006 WSJ piece, including:

I will tell the American people that a higher tax on gasoline is better at encouraging conservation than are heavy-handed CAFE regulations. It would not only encourage people to buy more fuel-efficient cars, but it would encourage them to drive less, such as by living closer to where they work. I will tell people that tolls are a good way to reduce traffic congestion — and with new technologies they are getting easier to collect. I will advocate a carbon tax as the best way to control global warming.

In a Sept. 16, 2006 post to his blog, Rogoff Joins the Pigou Club, Mankiw listed some three dozen other economists and pundits who have publicly advocated higher Pigovian taxes, such as gasoline taxes or carbon taxes. The list includes, in addition to several individuals mentioned here, such notables from economics, finance and journalism as Alan Greenspan, Gary Becker, William Nordhaus, Richard Posner, Anthony Lake, Martin Feldstein, Gregg Easterbrook and Lawrence Summers. (Links are included.)

In a June 1, 2008 NY Times column, The Problem With the Corporate Tax, Mankiw wrote:

I have a back-up plan for [Sen. McCain]: increase the gasoline tax. With Americans consuming about 140 billion gallons of gasoline a year, a gas-tax increase of about 40 cents a gallon could fund a corporate rate cut, fostering economic growth and reducing a variety of driving-related problems. Indeed, if we increased the tax on gasoline to the level that many experts consider optimal, we could raise enough revenue to eliminate the corporate income tax. And the price at the pump would still be far lower in the United States than in much of Europe.

In early 2012, Mankiw wrote in his NY Times column, A Better Tax System (Instructions Included):

Tax Bads Rather Than Goods: A good rule of thumb is that when you tax something, you get less of it. That means that taxes on hard work, saving and entrepreneurial risk-taking impede these fundamental drivers of economic growth. The alternative is to tax those things we would like to get less of. Consider the tax on gasoline. Driving your car is associated with various adverse side effects, which economists call externalities. These include traffic congestion, accidents, local pollution and global climate change. If the tax on gasoline were higher, people would alter their behavior to drive less. They would be more likely to take public transportation, use car pools or live closer to work. The incentives they face when deciding how much to drive would more closely match the true social costs and benefits. Economists who have added up all the externalities associated with driving conclude that a tax exceeding $2 a gallon makes sense. That would provide substantial revenue that could be used to reduce other taxes. By taxing bad things more, we could tax good things less. (Jan. 22, 2012)

Frank

We present this sampling from Prof. Frank’s columns in the NY Times Sunday business section:

Reducing CO2 emissions would actually be surprisingly easy. The most effective remedy would be a carbon tax, which would raise the after-tax price of goods in rough proportion to the size of their carbon footprint. Gasoline would become more expensive, piano lessons would not. The functional equivalent of that — a cap-and-trade system — worked spectacularly well when Congress required marketable permits for discharging sulfur dioxide (SO2) in 1995. Acid rain caused by SO2 emissions quickly plummeted, at about one-sixth the cost predicted. Once people have to pay for their emissions, they find ingenious ways of reducing them. (Shattering Myths to Help the Climate, Aug. 2, 2014)

Although an effective solution will take global coordination, America’s inaction has been a major barrier to progress. If the United States and Europe each adopted a steep carbon tax, they could elicit broader cooperation through heavy tariffs on goods produced in countries that failed to do likewise. India and China need access to our markets, giving us enormous leverage. (Shattering Myths to Help the Climate, Aug. 2, 2014)

NO one enjoys paying taxes — and no politician relishes raising them. Yet some taxes actually make us better off, even apart from the revenue they provide for public services. Taxes on activities with harmful side effects are a case in point. (Heads, You Win. Tails, You Win, Too., Jan. 5, 2013)

[W]e could insulate ourselves from catastrophic [climate] risk at relatively modest cost by enacting a steep carbon tax. Early studies by the Intergovernmental Panel on Climate Change estimated that a carbon tax of up to $80 per metric ton of emissions — a tax that might raise gasoline prices by 70 cents a gallon— would eventually result in climate stability. But because recent estimates about global warming have become more pessimistic, stabilization may require a much higher tax. How hard would it be to live with a tax of, say, $300 a ton? If such a tax were phased in, the prices of goods would rise gradually in proportion to the amount of carbon dioxide their production or use entailed. The price of gasoline, for example, would slowly rise by somewhat less than $3 a gallon. Motorists in many countries already pay that much more than Americans do, and they seem to have adapted by driving substantially more efficient vehicles. (Carbon Tax Silence, Overtaken by Events, Aug. 25, 2012)

Taxes are … a far cheaper and less coercive way to curtail [harmful] behavior than laws or prescriptive regulations. That’s because taxes concentrate harm reduction in the hands of those who can alter their behavior most easily. When we tax pollution, for instance, polluters with the cheapest ways to reduce emissions rush to adopt them, thereby avoiding the tax… Every dollar raised by taxing harmful activities is one dollar less that we must raise by taxing useful ones. The resulting revenue would enable us to reduce not only the federal deficit, but also the highly regressive payroll tax. And cutting that tax would stimulate hiring and help low-income families meet the burden of new taxes on harmful activities. (Find the Taxes That Do Double Duty, Feb. 18, 2011)

In 2012, Frank used the Obama-Romney presidential race to argue for both carbon emissions pricing and congestion pricing as ways to improve economic efficiency and well-being by taxing the externalities of carbon pollution traffic and traffic congestion. In Nation’s Choices Needn’t Be Painful (Sept 22, 2012), Frank pushed back against the then-prevailing view that “the nation face[d] difficult economic choices:

Consider highway congestion. Because drivers can generally enter a congested highway without charge, they often do so — thus adding to the crowding. But many drivers would willingly pay a fee for using that road if it resulted in fewer delays. A modest congestion fee, administered with E-ZPass-style technology, would raise needed revenue and provide an incentive to use crowded roads only when the benefits outweigh the social costs.

Critics object that such fees would harm low-income households. But because the gains far exceed their price, we can redistribute them so that everyone comes out ahead. Some of the new revenue, for example, could support tax relief for low-income households.

Similar spillover effects pervade the economy. People have little incentive to consider the danger of carbon emissions, for example, or the risks that the heavy vehicles they drive are posing to others. Taxing carbon emissions and taxing vehicles by weight would expand the economic pie by curtailing activities that do more harm than good. And because some of the resulting revenue could help low-income families, these taxes, too, needn’t be painful.

In the same 2012 op-ed, Frank ingeniously  parried the concern over raising taxes, even through externality pricing, at a time of economic stagnation:

Approving [externality taxes] now and scheduling them for phase-in only after the economy rebounds would serve two objectives. First, anxious credit markets would be reassured about the nation’s capacity to pay down government debt. And second, the delayed new taxes would speed the recovery by encouraging immediate increases in private spending.

With a carbon tax on the horizon, businesses would rush to develop technologies for adapting to higher energy prices. And consumers would accelerate major purchases to escape the looming consumption tax. The economy would get just the infusion of spending it needs — without the government’s having to spend a penny.

More recently, in August 2020, Frank took dead aim at “the fear that emissions would fall too slowly in response to a carbon tax” in another Times Sunday business column, Behavioral Contagion Could Spread the Benefits of a Carbon Tax:

[C]ritics are correct that a carbon tax alone won’t parry the climate threat. It is also true that as creatures of habit, humans tend to change their behavior only slowly, even in the face of significant financial incentives. But even small changes in behavior are greatly amplified by behavioral contagion — the social scientist’s term for how ideas and behaviors spread from person to person like infectious diseases. And if a carbon tax were to shift the behavior of some individuals now, those changes would quickly spread more widely.

Frank invoked social science data on cigarette smoking (and avoidance), homeowners’ installation of solar-photovoltaic panels, and, in this passage, meat eating (and avoidance), to argue that taxes on carbon emissions will reverberate more powerfully than is generally assumed:

Behavioral contagion also has been shown to influence dietary choices. People often eat meat because they grew up with, and continue to live among, people for whom substantial meat consumption is the norm. Because meat has a large carbon footprint, a carbon tax would make it more expensive relative to plant-based foods.

The direct effect of this price change would be small. But as some people shifted the composition of their diets, others would find it easier to shift as well. In short order, these positive-feedback effects would produce more widespread shifts in eating habits. Behavioral contagion would similarly amplify initial responses to a carbon tax in virtually every other energy-intensive activity. (emphases added)

Behavioral contagion is the primary subject of Frank’s latest (2020) book, Under the Influence: Putting Peer Pressure to Work. From the publisher’s blurb:

Under the Influence explains how to unlock the latent power of social context. It reveals how our environments encourage smoking, bullying, tax cheating, sexual predation, problem drinking, and wasteful energy use. We are building bigger houses, driving heavier cars, and engaging in a host of other activities that threaten the planet—mainly because that’s what friends and neighbors do.

Frank describes how the strongest predictor of our willingness to support climate-friendly policies, install solar panels, or buy an electric car is the number of people we know who have already done so. In the face of stakes that could not be higher, the book explains how we could redirect trillions of dollars annually in support of carbon-free energy sources, all without requiring painful sacrifices from anyone.

Other economists, listed alphabetically

Alan Blinder, Federal Reserve vice-chairman 1994-1996 and Princeton Professor of Economics and Public Affairs.  In “The Carbon Tax Miracle Cure,” Blinder suggested on the editorial page of the Wall Street Journal (Jan. 31, 2011):

[A] carbon tax… should be enacted now [but] set at zero for 2011 and 2012. After that, it would ramp up gradually… What’s critical is that we lock in higher future costs of carbon today.

Once America’s entrepreneurs and corporate executives see lucrative opportunities from carbon-saving devices and technologies, they will start investing right away—and in ways that make the most economic sense… I can hardly wait to witness the outpouring of ideas it would unleash. The next Steve Jobs, Bill Gates and Mark Zuckerberg are waiting in the wings to make themselves rich by helping the environment.  Jobs follow investment, and we need jobs now.

Blinder recommends using carbon tax revenue to reduce the deficit and underscores the advantages of a carbon tax over other deficit reduction strategies:

[E]very realistic observer knows that closing our humongous federal budget deficit will require a mix of higher taxes and lower spending as shares of GDP. Forget about value-added taxes and other new levies you may have heard about. A CO2 tax trumps them all… reducing our trade deficit, making our economy more efficient, ameliorating global warming, and showing the world that American capitalism has not lost its edge.

Tyler Cowen, economics professor at George Mason University. Cowen also directs the Mercatus Center, “which studies how societies become and stay prosperous, and is coauthor of the blog Marginal Revolution.”

Phase out all forms of capital income taxation, including the corporate income tax, and replace them with a carbon tax, including a gasoline tax. “Savings and investment boost economic growth, but when it comes to energy, global warming threatens as a major problem and our dependence on Middle Eastern oil damages our foreign policy.  (Cowen’s “Economic Idea #4 that voters need to hear”; from Economic Ideas for Republicans, U.S. News & World Report, Oct. 18, 2006; however, that link was inactive as of August 2014.)

Herman E. Daly, professor in the School of Public Policy at the University of Maryland, foremost U.S. ecological economist, author of Ecological Economics, Steady-State Economics, Valuing The Earth, among other works:

Is it hard to come up with a reasonable [climate] policy? Not really — a stiff severance tax on carbon, levied at the well head, mine mouth, or port of entry, would go a long way by both reducing carbon use and giving an incentive for developing alternative carbon-free technologies. Yes, but how do we know what is the optimal tax rate, and wouldn’t it be regressive, etc.? … [T]ax the resource throughput (that to which value is added) and stop taxing value added. Tax bads (depletion and pollution), not goods (income). Does anyone imagine that we tax income at the optimal rate? Better first to tax the right thing and later worry about the “optimal” rate of taxation, compensation for regressivity, etc. People don’t like to see the value added by their own efforts taxed away, even though we accept it as necessary up to a point. But most people don’t mind seeing resource rents, value that no one added, taxed away. And the most important public good served by the carbon tax would be climate stability, brought about by the consequent reduction in use of carbon fuels and the incentive to invent less carbon-intensive energy sources. And much of the revenue from the carbon severance tax could be rebated to the public by abolishing other taxes, especially regressive ones. Climate Change: From ‘Know How’ to ‘Do Now’, Grist, Aug. 14, 2007.

Gilbert Metcalf, Tufts University economist, was appointed in March 2011 by President Obama to head the energy office at the Treasury Department. Metcalf is a prominent and effective advocate of revenue-neutral carbon taxes. In August of 2007, the World Resources Institute and the Brookings Institution jointly published a policy brief by Prof. Metcalf, outlining a national carbon tax paired with a partial refund of the payroll tax. The brief assesses the expected emissions reductions from a tax starting at $15 per metric ton of carbon dioxide whose revenue would be used to rebate the federal payroll tax on the first $3,660 of earnings per worker. This tax swap is both revenue-neutral and distributionally neutral. (Video of Prof. Metcalf’s 2008 presentation.)

With Prof. David Weisbach (Univ. of Chicago Law School), Prof. Metcalf authored “The  Design of a Carbon Tax”  (Harvard Environmental Law Review, 2009) addressing carbon tax design issues: the tax rate (including distributional issues, the use of the revenues, and tax rate changes), the tax base, and international trade concerns.

Paul Portney, Dean, Eller College of Management, Univ. of Arizona (and president, Resources for the Future, 1995-2005):

[W]e’re nuts not to have instituted gradually increasing controls on CO2 and other greenhouse gases. The worst-case scenario, especially for future generations, is too scary not to be taking some preventative measures now. A carbon tax is obviously the best way to deal with this problem. It would raise revenues the government will badly need to pay for Social Security and Medicare as old fogies like me begin to retire, as well as create incentives for energy conservation, emissions reductions, and clean technology innovation. (What Are the Biggest Environmental Challenges Facing the United States?, RFF Weekly Policy Commentary, Sept. 10, 2007)

Robert Reich, Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley, former Secretary of Labor and co-founder of The American Prospect :

What’s needed is a carbon tax — a tax on all fossil-based fuels that reflects their true social, political, and environmental costs. That should remain the goal, but as a practical matter it’s not going to happen any time soon. Republicans won’t enact a tax hike for any purpose. And right now congressional Democrats don’t have the intestinal fortitude, or the votes, to enact it on their own. (American Prospect Online Edition, Inherit the Windfall Feb. 7, 2007)

Economist Jeffrey Sachs, director of the Earth Institute at Columbia University:

The changeover to a sustainable energy system will take decades and will require carbon taxes and emission permits to create market-based incentives for companies and individuals to switch to new kinds of electrical power plants, new kinds of automobiles and ‘green buildings.’ (Miami Herald, We Must Reverse Global Warming, Feb. 23, 2007)

The world’s producers and consumers currently regard the air as a free dumping ground for carbon dioxide and other climate-changing greenhouse gases. We need to correct market forces—for example, by taxing carbon emissions that are offset by tax reductions elsewhere—in order to create the right incentives. (Time Magazine, March 24, 2008; direct link unavailable, but full text was published later that year in Petroleum World).

[T]here is a much better strategy than tradable [emission] permits. Each region of the world should introduce a tax on CO₂ emissions that starts low today and increases gradually and predictably in the future. Part of the tax revenue should be channeled into subsidies for new low-carbon energy sources like wind and solar, and to cover the costs of developing CCS (Carbon Capture & Sequestration). These subsidies could start fairly high and decline gradually over time, as the tax on CO₂ emissions rises and the costs of new energy technologies fall with more experience and innovation. With a long-term and predictable carbon tax and subsidy system, the world would move systematically toward low-carbon energy, greater energy efficiency, and CCS. (Economy Watch, Towards A Global Carbon Tax – A Better Way To Fight Climate Change?, March 4, 2013).

Robert J. Shapiro, former Undersecretary of Commerce for Economic Affairs

Mr. Shapiro, Commerce Undersecretary in the Clinton Administration, authored the American Consumer Institute’s Feb. 2007 report, Addressing the Risks of Climate Change: The Environmental Effectiveness and Economic Efficiency of Emissions Caps and Tradable Permits, Compared to Carbon Taxes. From the Executive Summary:

Carbon taxes would be a better response to the risks of global warming than emissions caps and tradable permits (commonly referred to as cap-and-trade)… [Carbon taxes] are much less vulnerable to evasion and market manipulation, providing a more stable and transparent system for consumers and industry alike. [Carbon taxes] do not create the price volatility and administrative problems associated with cap and trade.

In a June 2008 follow-on study, Addressing Climate Change Without Impairing the U.S. Economy: The Economics and Environmental Science of Combining a Carbon-Based Tax and Tax Relief, Shapiro calls for a federal carbon tax starting at $14 per metric ton of CO₂ in 2010 and rising steadily to $50 in 2030 (equivalent to $82 with inflation). Shapiro concludes that the nearly revenue-neutral carbon tax would reduce CO₂ emissions by 30% below non-taxed levels while shaving only eight-tenths of one percent off future (2030) GDP. The report was published by the U.S. Climate Task Force, a project of Shapiro’s Sonecon economic advisory company.

Joseph E. Stiglitz, Nobel laureate in economics and University Professor at Columbia University; formerly Chairman of President Bill Clinton’s Council of Economic Advisers and Senior Vice President and Chief Economist of the World Bank:

Not paying the cost of damage to the environment is a subsidy, just as not paying the full costs of workers would be… American firms are being subsidized—and massively so. There is a simple remedy: other countries should prohibit the importation of American goods produced using energy intensive technologies, or, at the very least, impose a high tax on them, to offset the subsidy that those goods currently are receiving. (A New Agenda for Global Warming, Economists’ Voice, July 2006)

Economic efficiency requires that those who generate emissions pay the cost, and the simplest way of forcing them to do so is through a carbon tax. There could be an international agreement that every country would impose a carbon tax at an agreed rate (reflecting the global social cost). Indeed, it makes far more sense to tax bad things, like pollution, than to tax good things like work and savings. Such a tax would increase global efficiency. Of course, polluting industries like the cap-and-trade system. While it provides them an incentive not to pollute, emission allowances offset much of what they would have to pay under a tax system. Some firms can even make money off the deal. Moreover, Europe has grown used to the concept of cap-and-trade, and many are loathe to try an alternative. Yet, no one has proposed an acceptable set of principles for assigning emission rights. (Showdown in Bali, Project Syndicate, Dec. 2007)

More recently, Stiglitz has decried the stalled UN climate negotiations as a “charade.”  Stigliz feels that the 2 decade-long attempt to allocate responsibility for reducing emissions among nations is doomed; he instead urges negotiators to shift to a price-based negotiation to set a global carbon tax:

Stiglitz’s plan is to set a single, global price for carbon dioxide, the most important greenhouse gas. The idea is to make it so expensive to use carbon that consumers and businesses voluntarily use less of it. Countries could raise the price of carbon either with a tax or with a domestic cap-and-trade system, Stiglitz says. In his vision, if a country didn’t set its carbon price high enough, hoping to gain a pricing advantage, other countries would be allowed to charge tariffs on its exports. He would throw in a green fund to compensate hard-hit poor countries. (Stiglitz Calls Climate Talks a ‘Charade,’ Pushes Plan C, Bloomberg, 7/10/15)

Lawrence Summers, Charles W. Eliot university professor (and former president), Harvard University (and Former Treasury Secretary):

[T]he U.S. must engage in an energy efficiency program that takes effect without delay and has meaningful bite. As long as developing countries can point to the U.S. as a free rider there will not be serious dialogue about what they are willing to do. I prefer carbon and/or gasoline tax measures to permit systems or heavy regulatory approaches because the latter are more likely to be economically inefficient and to be regressive.” (Financial Times, Practical Steps to Climate Control, May 28, 2007)

Paul Volcker, chairman of the U.S. Federal Reserve, 1979-1987: See discussion on our “Public Officials” page.

Janet Yellen, co-chair, G30 Working Group on Climate Change and Finance; chairman of the U.S. Federal Reserve, 2014-2018, vice-chair, 2010-2014:

Carbon pricing is key. All firms across our economy need to pay the price of polluting the planet. It will certainly affect the economics of fracking and coal — the idea is to drive that stuff out of business over time. Maybe it doesn’t sound pleasant to say, but that’s what has to happen. (The 39 Things Biden Should Do First on Climate Change, Bloomberg Green, Nov. 11, 2020)

Gary Yohe, IPCC “Fourth Assessment” chapter editor and Professor of Economics at Wesleyan University. Prof. Yohe presented on the economic rationale for carbon pricing at the Wesleyan “Pricing Carbon” Conference in Nov. 2010, and was profiled on this point in Yale 360 in Dec. 2008.

This page, featuring public officials, is one of half-a-dozen pages compiling expressions of support for carbon taxes (or more targeted taxes, e.g., on gasoline) by notable individuals and organizations. To access other pages with different supporter categories, click on the Progress link on the navigation bar and move to the desired category.

Biden Cabinet

Janet Yellen, Treasury Secretary-designate:

Carbon pricing is key. All firms across our economy need to pay the price of polluting the planet. It will certainly affect the economics of fracking and coal — the idea is to drive that stuff out of business over time. Maybe it doesn’t sound pleasant to say, but that’s what has to happen. (The 41 Things Biden Should Do First on Climate Change, Bloomberg Green, Nov. 11, 2020)

U.S. Senate

Senator Bernie Sanders (I-VT)

Senator Sanders introduced his Climate Protection and Justice Act last Dec. 9, just prior to the closing of the Paris Climate Summit. We discuss the bill here, but it has been in his presidential campaign that Sen. Sanders has put a carbon pollution tax on the political map, unabashedly championing the idea in the debates and criticizing former Secretary of State Hillary Clinton for not similarly making a carbon tax the centerpiece of her climate program.

 

In June 2016, Grist magazine posted a terrific campaign compendium, Our Favorite Bernie Sanders Moments, noting that Sanders called climate change the greatest threat to our national security and pulled Hillary Clinton to the left on climate and energy. Here are excerpts:

On taxing carbon: His climate change plan called for a carbon tax that will “tax polluters causing the climate crisis, and return billions of dollars to working families to ensure the fossil fuel companies don’t subject us to unfair rate hikes.” And it aimed for a 40 percent cut in emissions by 2030, compared to 1990 levels — a level of ambition on par with Europe’s.

On offshore drilling: The plan also called for ending offshore drilling, for the sake of energy security and the environment. “If we are serious about moving beyond oil toward energy independence, lowering the cost of energy, combating climate change, and cutting carbon pollution emissions, then we must ban offshore drilling,” it read.

On climate denial: “The reality is that the fossil fuel industry is to blame for much of the climate change skepticism in America,” Sanders says in his climate plan. In October, he joined those calling for the Department of Justice to investigate ExxonMobil’s climate obfuscation.

On Donald Trump’s climate denial: “How brilliant can you be?” mocked Sanders in front of a New Hampshire audience in January. “The entire scientific community has concluded that climate change is real and causing major problems, and Trump believes that it’s a hoax created by the Chinese. Surprised it wasn’t the Mexicans.” Trump, for his part, has a history of flip-flopping on climate.

On encountering a climate-denying teenager: “Thank you for your question. You’re wrong.”

On climate change as a security threat: In an October debate, Sanders said climate change was the greatest threat to U.S. national security: “The scientific community is telling us that if we do not address the global crisis of climate change, transform our energy system away from fossil fuel to sustainable energy, the planet that we’re going to be leaving our kids and our grandchildren may well not be habitable. That is a major crisis.” In a debate in November, Sanders said that “climate change is directly related to the growth of terrorism.” (PolitiFact later called out the causality here as Mostly False, but there are indeed some linkages between climate change and war.)

On the Paris climate agreement: “While this is a step forward it goes nowhere near far enough. The planet is in crisis. We need bold action in the very near future and this does not provide that,” said Sanders in December. Clinton’s campaign chair John Podesta later used this statement to argue that Sanders wanted to back out of the Paris Agreement.

On keeping it in the ground: In November, he cosponsored the Keep It in the Ground Act of 2015, which would halt new coal leases on public lands and prohibit drilling on the outer continental shelf.

On the fossil fuel industry: “To hell with the fossil fuel industry.”

Grist noted that in March, the Climate Hawks Vote PAC ran a survey asking which candidate it should it endorse, and Sanders got 92 percent of the vote. “We need clean-energy leadership in the White House,” wrote the group it its subsequent endorsement of Sanders. “We need a climate revolution.”

Senator Sheldon Whitehouse (D-RI)

On Nov. 19, 2014, Senator Whitehouse, famous for his weekly floor speeches about the dangers of global warming, introduced the American Opportunity Carbon Fee Act which would impose a $42 per ton carbon tax, increasing annually at 2% above inflation. Senator Whitehouse’s price trajectory follows the Obama Administration’s central estimate of the “social cost of carbon,” the value of the harms caused by carbon pollution including falling agricultural productivity, damages to human health, and property losses from flooding.

The fee would be assessed on all coal, oil, and natural gas produced in or imported to the U.S. and also cover large emitters of non-carbon greenhouse gases and carbon dioxide from non-fossil-fuel sources.

All revenue generated by the carbon pollution fee – which could exceed $2 trillion over ten years – would be credited to an American Opportunity Fund to be returned to the American people.  Possible uses include:

• Economic assistance to low-income families and those residing in areas with high energy costs
• Tax cuts
• Social security benefit increases
• Tuition assistance and student debt relief
• Infrastructure investments
• Dividends to individuals and families
• Transition assistance to workers and businesses in energy-intensive and fossil-fuel industries
• Climate mitigation or adaptation
• Reducing the national debt

Senator Whitehouse spoke at length about this legislation on the Senate floor in introducing it. Video of his remarks can be seen here, and text is available here. Senator Whitehouse re-introduced an updated version of his proposal in May 2015, which raises the initial tax level slightly, to $45 per ton of CO2.

Congressman John B. Larson (D-CT)

Rep. John B. Larson, an 8th-term representative from Hartford, introduced his American Energy Security Trust Fund Act in August 2008 with twelve co-sponsors. His bill would impose an upstream tax on emissions of carbon dioxide of $15/ton with the level increasing by at least $10/ton annually. CTC estimates this trajectory would reduce U.S. CO2 emissions by 1/3 within a decade. Larson proposes a tax shift, using carbon tax revenue primarily to rebate payroll taxes.  Here is CTC’s commentary on the Larson bill and here is the bill.  Larson sponsored and kicked off CTC’s 2008 House briefing on Carbon Taxes.

Former Public Officials

George P. Shultz, former Secretary of State

Mr. Shultz, U.S. Secretary of Labor under Pres. Nixon (1969-70), Treasury Secretary under Presidents Nixon and Ford (1972-74), and Secretary of State under Pres. Reagan (1982-89), a consummate member of the Washington establishment, co-chairs a task force at Stanford that is urging Republicans to support a carbon tax. (See Stanford’s George Shultz on energy: It’s personal, Stanford Report, July 2012).

Following is an excerpt from his op-ed, How to Gain a Climate Consensus, in the Washington Post, Sept. 5, 2007:

The use of economic incentives (caps and trading rights, and carbon taxes) is essential to avoid disastrously high costs of control. The cap-and-trade system has been highly successful in reducing sulfur dioxide emissions by electricity utilities in the United States. That system relies on a scientifically valid and accepted emission-measurement system used by a clearly identified and homogeneous set of utilities. Fortunately, such a careful system of measurement exists for a viable greenhouse gas regimen. The product of collaboration between the World Resources Institute and the World Business Council for Sustainable Development, these standards for accounting and reporting greenhouse gases should be duly understood and adopted. Even with clear units of account, however, large problems arise as the coverage and heterogeneity of the system grow. And for trading across borders, the system needs to be accepted among the trading partners. Scams are easy to imagine. No nation should be allowed to trade without a verifiable, transparent system of measuring and monitoring of reductions, and holding emitters accountable. In many respects, a straight-out carbon tax is simpler and likelier to produce the desired result. If the tax were offset by cuts elsewhere to make it revenue-neutral, acceptability would be enhanced.

Gregory Mankiw, former Chair, President’s Council of Economic Advisers

Click here for links to the many pro-carbon tax articles and blog posts by President George W. Bush’s chief economic adviser, 2003-2005.  Mankiw, who teaches at Harvard, is the convener of the “Pigou Club” which he describes as an elite group of of economists and pundits who support taxing pollution instead of productive activity.

Lawrence Lindsey, former Director of the National Economic Council  and Assistant to the President on Economic Policy under President George W. Bush

Recommending permanent tax cuts, Mr. Lindsey also recommends a “greenhouse emissions tax” as the source of funding. “Longer term, however, spending cuts or a new source of revenue would be needed. Given the agenda of the incoming administration, the best source of such funds would be a greenhouse emissions tax.” (From Lawrence Lindsey Joins the Schumpeter Club, Capital Commerce, in U.S. News & World Report, December 30, 2008.)

William Ruckelhaus, former Administrator, U.S. Environmental Protection Agency

According to Grist Magazine, Ruckelhaus favors a carbon tax over cap-and-trade, since a carbon tax like cap-and-trade would rely upon market forces to determine where reductions should occur, but government administration would be much simpler. “It has the desired effect … It moves consumption toward less carbon-intensive activities. It does everything a cap-and-trade system does, but it’s about ten times simpler. And about one-tenth as popular, which is why we don’t have it.” (Obama’s Preferred Bill: EPA’s first administrator is bullish on Obama, but not cap-and-trade, Grist, December 29, 2008.)

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.

There’s more about these two polls as well as earlier ones on our page on opinion polling.

29. 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 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.

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:

• 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.

Related CTC blog posts

• The Carbon Tax Revenue Menu (6/10/2011)
• Should Carbon Pricing Advocates Support the Cap-and-Dividend Bill? (12/2/2010)
• Scientist James Hansen Proposes “People’s Climate Stewardship Act”: A Simple Carbon Fee with Revenue Returned to Americans (4/25/2010)
• Progressive Democrats Say: “Cut Out Wall Street — Price Carbon Directly and Recycle Revenue to Households.” (10/20/2009)
• Back to Plan A: The Revenue-Neutral Carbon Tax (7/6/2009)

Related news reports and opinion pieces

• Alaska’s Permanent Dividend Fund — A policy ripe for export (Bangor Daily News, 6/20/2011)
• James Hansen Rails Against Cap-and-Trade in Open Letter, Advocates Fee-and-Dividend to Reduce Carbon Emissions (The Guardian, 1/12/2010)
• Cap and Fade (James Hansen, NYT op-ed, 12/6/2009)
• How CBO budget scoring devalues efficiency (Dave Roberts, Grist 10/15/2009)

Cogent opinion pieces by dividend proponent James K. Boyce (U-Mass, Amherst)

• Does Biden’s insurance policy for the climate go far enough? (The Hill, 2/26/2021)
• Carbon Dividends: The Bipartisan Key to Climate Policy? (Institute for New Economic Thinking, 2/17/2017)
• The Carbon Dividend (New York Times, July 29, 2014)

Tax-Shifting

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 addition to this potential progressive effect of tax shifting, a wide range of economists, [including Lawrence Goulder, Roberton Williams & Ian Parry, Gilbert Metcalf & David Weisbach, Alan Viard, Robert Shapiro, Donald Marron & Eric Toder] have concluded that use of revenue to reduce other taxes would improve the overall efficiency of the economy, for example, by removing burdens on work.

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).

Related CTC blog posts and articles

• British Columbia’s Carbon Tax Architects Speak (2015).
• The Carbon Tax Revenue Menu, outlining the benefits of various revenue options (2011).
• Carbon Tax Offers Super Powers to Super-Committee, discussing potential for a carbon tax to reduce the deficit (2011).
• Midterm Advice for Congress: Tax Carbon Instead of Jobs (Robert Shapiro, Huffington Post, 2010).
• Capitol Hill Briefing on Carbon Taxes Draws Overflow Crowd, Rep. John Larson (D-CT) led off CTC’s event, articulating the benefits of a taxing carbon pollution while cutting wage taxes (12/9/08).

Related journal articles and papers

• Taxing Carbon and Recycling the Revenue: Who Wins and Loses? (Donald Marron, Eric Toder, and Lydia Austin, Urban-Brookings Tax Policy Center, Nov. 2015).
• Tax Policy Issues in Designing a Carbon Tax (Donald B. Marron and Eric J. Toder, Urban-Brookings Tax Policy Center, 2014).
• Getting to an Efficient Carbon Tax: How the Revenue is Used Matters (Jared Carbone, Richard D. Morgenstern, Roberton C. Williams III, and Dallas Burtraw, Resources for the Future, 2014).
• A Carbon Tax in Broader U.S. Fiscal Reform: Design and Distributional Issues, Adele Morris (Brookings) and Aparna Mathur (American Enterprise Institute), C2ES, 2014).
• Carbon Tax Revenue and the Budget Deficit: A Win-Win-Win Solution? (MIT, 2012).
• The Potential Role of a Carbon Tax in U.S. Fiscal Reform (Brookings, 2012).
• Fiscal Policy to Mitigate Climate Change (IMF, 2012).
• How Climate Policy Could Address Fiscal Shortfalls (Adele Morris & Ted Gayer, Brookings, 2010).
• Addressing Climate Change Without Impairing the US Economy (Robert Shapiro, U.S. Climate Task Force, 2009).
• A Proposal for a U.S. Carbon Tax Swap (Gilbert Metcalf, Brookings, 2007).