Search Results for: cap and trade

This page features editorial positions by newspapers, magazines, etc. (rather than merely opinions expressed by columnists or reporters). Half a dozen other pages with different “supporter” categories may be accessed via the “Progress” tab in our menu bar.

The New York Times

Editorials at the Times carry the imprimatur of the editorial board. In years past, the Times repeatedly urged only that nations “put a price” on carbon emissions — a vague formulation that has often connoted support for cap-and-trade. In 2015, the board finally began calling for an explicit carbon tax, and opened 2016 citing British Columbia’s successful carbon tax:

Proof That a Price on Carbon Works (January 19, 2016):

British Columbia started taxing emissions in 2008. One big appeal of its system is that it is essentially revenue-neutral. People pay more for energy (the price of gasoline is up by about 17 cents a gallon) but pay less in personal income and corporate taxes. And low-income and rural residents get special tax credits. The tax has raised about $4.3 billion while other taxes have been cut by about $5 billion. Researchers have found that the tax helped cut emissions but has had no negative impact on the province’s growth rate, which has been about the same or slightly faster than the country as a whole in recent years.

The Paris Climate Pact Will Need Strong Follow-Up  (December 14, 2015):

Much was said about how the agreement sent a strong “signal” to investors, and indeed, Paris was swarming with corporate chieftains and Silicon Valley heavyweights. But the strength of that signal will depend heavily on whether governments are willing to promote such investments while removing the tax subsidies that favor dirtier fossil fuels — perhaps to the point of embracing carbon taxes.

The Case for a Carbon Tax (June 6, 2015):

A carbon tax would raise the price of fossil fuels, with more taxes collected on fuels that generate more emissions, like coal. This tax would reduce demand for high-carbon emission fuels and increase demand for lower-emisson fuels like natural gas. Renewable sources like solar, wind, nuclear and hydroelectric would face lower taxes or no taxes. To be effective, the tax should also be applied to imported goods from countries that do not assess a similar levy on the use of fossil fuels.

Revenue generated by carbon taxes could be used for a variety of purposes. A lot of the money should surely be given to households, especially the poorest, through tax credits or direct payments to offset the higher prices they would have to pay for gasoline, electricity and other goods and services because of the tax. Some of the money could be used to invest in renewable energy and public transportation, or to lower other taxes.

Global Warming and Your Wallet (July 6, 2007): “When the market, on its own, fails to arrive at the proper price for goods and services, it’s the job of government to correct the failure… We are now using the atmosphere as a free dumping ground for carbon emissions. Unless we — industry and consumers — are made to pay a significant price for doing so, we will never get anywhere.”

Warming Up on Capitol Hill (March 25, 2007): “Forcing polluters to, in effect, pay a fee for every ton of carbon dioxide they emit will create powerful incentives for developing and deploying cleaner technologies.”

The Truth About Coal (Feb. 25, 2007): “There is a need to put a price on carbon to force companies to abandon older, dirtier technologies for newer, cleaner ones. Right now, everyone is using the atmosphere like a municipal dump, depositing carbon dioxide free. Start charging for the privilege and people will find smarter ways to do business. A carbon tax is one approach. Another is to impose a steadily decreasing cap on emissions and let individual companies figure out ways to stay below the cap.”

Avoiding Calamity on the Cheap (Nov. 3, 2006): “Since the dawn of the industrial revolution, the atmosphere has served as a free dumping ground for carbon gases. If people and industries are made to pay heavily for the privilege, they will inevitably be driven to develop cleaner fuels, cars and factories.”

The Washington Post

Carbon tax is best option Congress has (May 7, 2013):

Sen. Max Baucus (D-Mont.), chairman of the Finance Committee, announced last month that he wants to spend the rest of his final term in office reforming the tax code , and there are signs that Republicans want an overhaul this year, too…

No honest tax reform paper, for example, would be complete without discussion of a carbon tax, an elegant policy Congress could immediately take off the shelf. It would make polluters pay for their own pollution, which is the best way to encourage greener thinking. It would cut emissions without overspending national wealth on grandiose central planning or command-and-control regulation. And it would raise revenue, which lawmakers could use for debt reduction, lowering other taxes, improving the social safety net or some combination. The carbon tax is one of the best ideas in Washington almost no one in Congress will talk about.

Those still worried about the economic effects need only consider how it could fit into a bigger tax-reform package such as the one Mr. Baucus wants to produce. Surely, Republicans should want to replace economy-sapping taxes on labor or business in return for a much more efficient tax on pollution. Democrats should be pushing for some of the revenue to pump up programs such as the Earned Income Tax Credit to ensure the carbon tax doesn’t sting consumers, particularly those least able to afford it.

Lawmakers should read the Finance Committee staff’s work and then consult a recent analysis by the Brookings Institution’s Adele Morris , who found that even a relatively modest carbon tax could produce nearly a trillion dollars in debt reduction over two decades, significantly drop other tax rates and enhance anti-poverty programs.

The carbon tax (November 10, 2012):

EARLY WEDNESDAY, delivering his victory speech in Chicago, President Obama elevated an issue that had hardly come up during the campaign. “We want our children to live in an America,” he said, “that isn’t threatened by the destructive power of a warming planet.”

Later that day, Senate Majority Leader Harry M. Reid (D-Nev.) told reporters that climate change is an important issue and that he wants to “address it reasonably” — particularly following big storms in the Northeast that have highlighted rising sea levels and other dangers associated with global warming.

House Speaker John R. Boehner (R-Ohio), meanwhile, spoke about cooperating with Democrats on urgently needed budget reform

Now if there were just some policy that would reduce carbon emissions and raise federal ­revenue . . .

A tax on carbon, of course, is that policy, and lawmakers and the president should be discussing it. The idea is to put a simple price on emissions of carbon dioxide and other greenhouse gases — some dollar amount per ton of CO² — that steadily increases at a pre-set rate.

This is the best plan lawmakers can take off the shelf to fight global warming. As an added benefit, it would reduce dependence on imported oil. If businesses and consumers had to pay something for the otherwise invisible costs of their actions — in this case, pollution — they would be more careful. Their combined preferences, not those of Congress or bureaucrats, would determine how to wring carbon out of the economy.
Homeowners might turn down their thermostats or weatherize their windows. Power companies would devise the cheapest ways to reduce the carbon dioxide they emit, without the government ordering them to build this or to refrain from that. At first, they would probably burn more natural gas and less coal, a cheap way to cut lots of emissions quickly. In the long term, the demand for green technologies would expand, and with it private investment.

Sorry Record – Waiting for breakthrough technologies is not the way to reduce greenhouse gases (July 11, 2006)

[The Administration] has resisted taxing carbon use, preferring instead to provide incentives for oil and gas extraction — just the opposite of what’s needed.

Some Positive Energy — Now Start Talking About a Carbon Tax, (June 25, 2007).

As important as many of the measures in [the Senate energy] bill are, they amount to only tinkering at the margins of a serious problem. What the Senate bill doesn’t do — and what the House bill won’t do when it is brought to the floor for consideration next month — is spark a necessary debate on the imposition of a cap-and-trade system or a carbon tax. This must be on the agenda after the Fourth of July recess when the Senate is expected to take up global warming. Sooner or later, Congress will have to realize that slapping a price on carbon emissions and then getting out of the way to let the market decide how best to deal with it is the wisest course of action.

Los Angeles Times

How California can best fight climate change (July 14, 2014):

A carbon tax that pushes up gas prices would give all California drivers reason to be gas-thrifty. They could then decide whether to use their tax credit to offset the increased cost of buying gas or find ways to reduce gas purchases and use the credit for other purchases. Substantially larger tax credits would go to lower-income residents and perhaps to rural residents for whom public transit isn’t available. Some of the money could be set aside for rebates to residents who buy fuel-efficient cars, or to agricultural operations that switch to cleaner farm vehicles or methane-capture technologies.

The L.A. Times ran two stirring editorials in May-June 2007 that powerfully made the case for taxing carbon. Here are excerpts:

Time to Tax Carbon, (May 28, 2007):

There is a growing consensus among economists around the world that a carbon tax is the best way to combat global warming, and there are prominent backers across the political spectrum … Yet the political consensus is going in a very different direction. European leaders are pushing hard for the United States and other countries to join their failed carbon-trading scheme, and there are no fewer than five bills before Congress that would impose a federal cap-and-trade system. On the other side, there is just one lonely bill in the House, from Rep. Pete Stark (D-Fremont), to impose a carbon tax, and it’s not expected to go far.

The obvious reason is that, for voters, taxes are radioactive, while carbon trading sounds like something that just affects utilities and big corporations. The many green politicians stumping for cap-and-trade seldom point out that such a system would result in higher and less predictable power bills. Ironically, even though a carbon tax could cost voters less, cap-and-trade is being sold as the more consumer-friendly approach.

A well-designed, well-monitored carbon-trading scheme could deeply reduce greenhouse gases with less economic damage than pure regulation. But it’s not the best way, and it is so complex that it would probably take many years to iron out all the wrinkles. Voters might well embrace carbon taxes if political leaders were more honest about the comparative costs.

Reinveting Kyoto, (June 11, 2007):

A better treaty [than Kyoto] would scrap the unworkable carbon-trading scheme and instead impose new taxes on carbon-based fuels. As recently explained in the first installment of this series [Time to Tax Carbon, above], carbon taxes avoid many of the pitfalls of carbon trading. They would produce an equal incentive for every nation to clean up without relying on arbitrary dates or caps, or transferring money from one nation to another. They’re also much less subject to corruption because they give governments an incentive to monitor and crack down on polluters (the tax money goes to the government, so the government wins by keeping polluters honest)… Real solutions to global warming, such as carbon taxes, won’t come cheap — they’ll make power bills steeper and gas prices even higher than they are now. But the economic news isn’t all bad. Much of the clean technology of the future will probably be developed in the United States and sold overseas. Think of [a carbon tax] as a novel way of reducing our trade deficit with China while building a cleaner world.“

For the strong critique of cap-and-trade in the Time to Tax Carbon editorial, click here.

Other Newspapers

Albany Times-Union:

THE ISSUE: Evidence of a warming planet is clear and obvious.

THE STAKES: A carbon tax is needed to stave off a looming global crisis.

[Fossil fuel subsidies] are an absurd use of public finances, and must be eliminated as quickly as possible. That long-overdue move must be coupled with a stiff carbon tax that makes fossil fuels artificially and increasingly expensive. Such a tax would immediately make greener energy more competitive, and encourage private enterprise to develop new and better technologies. And it would acknowledge that fossils fuels have a negative societal cost that is increasingly intolerable.

Here’s another idea with merit: an import tax that charges manufacturers for the carbon impact of their products. Such tariffs, which are now being weighed by the European Union and Democrats in Congress, would leverage American buying power to force global changes and reduce concern that fighting climate change domestically puts the country’s economy at a global disadvantage.

Certainly, carbon taxes and tariffs would hit lower-income Americans too hard. That’s why both must be structured with rebates that alleviate the pain.

But as 100-year storms become 10- or 5-year storms, the cost of our stubborn inaction grows increasingly clear. The time for change is now, if not sooner.

Editorial: How soon is now?, Sept 8, 2021.

Detroit Free Press:

A tax on carbon dioxide emissions, phased in gradually but relentlessly, would be the most transparent and efficient step this country could take in the search for energy independence and reductions in many emissions, including carbon dioxide. It would send a hugely important signal to the markets — for cars and for alternative energy sources such as windmills and solar collectors, in particular — that innovation and conservation are essential. Consumers are going to pay for any measures taken to reduce greenhouse gases and shift away from dependence on foreign petroleum. But most politicians choose instead to hide the costs by placing expensive demands on automakers and by dispensing subsidies for alternative fuels, such as ethanol, that become a hidden tax burden. A cap-and-trade system for emissions also would have disguised costs. Keep Carbon Tax in the Mix of Solutions, July 12, 2007.

Chicago Tribune:

[T]he ultimate goal should not be to reduce the price consumers pay at the pump. It should be to reduce the amount going to oil producers. Global warming is more than ample grounds for levying taxes on carbon-based fuels, including gasoline, to reduce emissions. But those taxes would fall partly on foreign oil producers. By cutting consumption, they promise to put downward pressure on world crude oil prices—weakening OPEC and stemming the flow of dollars to anti-American regimes. American consumers have a choice: They can pay high prices to oil producers or to themselves. The tax proceeds can be used to finance programs of value here at home or to pay for cuts in other taxes—even as they curb the release of carbon dioxide. Pump Pain, May 20, 2008.

Christian Science Monitor:

Consumption taxes, after all, are often designed to wean people off bad behavior, such as smoking. A 90 percent drop in these emissions is probably what’s needed to limit any rise in atmospheric warming to 2 degrees Celsius, a goal that many scientists recommend. Most presidential candidates do endorse pinching pocketbooks, but only indirectly, such as by calling for higher fuel efficiency in vehicles and a cap on greenhouse-gas pollution from company smokestacks. Such demands on industry have the advantage of creating more certainty in reducing emissions, but they are complex to enforce. Gore would do both: tax carbon use and cap emissions. Putting a crimp on global warming can’t be done solely by promoting new energy technologies and voluntary conservation. Consumers of oil and coal need a direct tax shock. Christian Science Monitor, July 5, 2007.

The Monitor was even more direct in a pair of editorials on Oct. 25 and 26. In the first, Be Wary of Complex Carbon Caps, the Monitor noted the loopholes, fraud and other problems that have hamstrung carbon cap-and-trade programs. In the second, A Tax on Carbon to Cool the Planet, the Monitor summarized the first editorial:

Indeed, caps may put the US on a knowable track to, say, an 80 percent reduction in carbon emissions by 2050. But as the previous Monitor’s View pointed out, the flaws in cap-and-trade plans as experienced in other nations – their complexity and vulnerability to fraud and special-interest lobbyists – would reduce the intended effect. They also take a long time to set up and get working right. And, in the end, they also raise energy prices for consumers, just not as directly as a tax.

The Monitor then concluded:

With Europe’s cap-and-trade system faltering, the US should be a leader in using a carbon tax, even if big polluters such as China don’t follow. As a last resort, the US could tax goods from countries that fail to cut their carbon emissions.

A carbon tax is not the whole solution. Regulations will still be needed, such as stiffer fuel-economy standards for cars and trucks. And the US should fund research into alternative fuels, too. All it takes is the political will to act.

Eugene (OR) Register-Guard:

The crisis presented by global warming demands a response that is simple, comprehensive and effective. A tax on carbon consumption is the only response in sight that both discourages the production of emissions that cause global warming, and finances the rapid transition to a post-carbon economy… “The best way to tax carbon fuels is at the point of production: at the wellhead, mine or biofuel plant. The added tax should be large – starting at the equivalent of $1 per gallon of gasoline, and increasing to the equivalent of $6 per gallon of gasoline over 10 years… The phase-in of high taxes on carbon fuels over 10 years will provide huge incentives for market-financed, market-driven, market-governed development of unsubsidized, safe, sustainable alternate energy sources, far more efficient uses of energy, and other alternate products and methods. (The Cold Truth, July 22, 2007).

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.)

With U.S. carbon dioxide emissions from fossil fuel combustion currently (2022) hovering above 5 billion metric tons a year, even a midrange carbon tax of $50 per metric ton would generate on the order of $250 billion in annual revenue. The magnitude of this figure underscores the importance of designing and implementing a carbon tax carefully and skillfully.

Unsurprisingly, this subject has spawned a robust literature. Below, we summarize two excellent resources, from 2009 and 2015, written by pre-eminent experts in carbon tax policy and economics.

An even better starting point is the Jan. 2017) report by the U.S. Treasury’s Office of Tax Analysis, Methodology for Analyzing a Carbon Tax. It’s a superb and mercifully brief (28 pages) guide to the nuts and bolts of administering a carbon tax. The table at left is indicative of its detail. Download here (pdf).

The Design of a Carbon Tax (Gilbert Metcalf & David Weisbach, Harvard Environmental Law Review, 2009; 58 pp.). Here’s the article’s abstract:

We consider the design of a tax on greenhouse gas emissions for the United States. We consider three major issues: the tax rate (including the use of the revenues and rate changes over time), the optimal tax base, and international trade concerns.

We show that a well-designed carbon tax can capture about 80% of U.S. emissions by taxing only a few thousand taxpayers, and almost 90% with a modest additional cost. We recommend full or partial delegation of rate setting authority to an agency to ensure that rates reflect current information about the costs of carbon emissions and abatement. Adjustments should be made to the income tax to ensure that a carbon tax is revenue neutral and distributionally neutral.

Finally, we propose an origin-basis system for trade with countries that have an adequate carbon tax, and a system of border taxes for imports from countries without a carbon tax. We suggest a system that imposes presumptive border tax adjustments, but allows an individual firm to prove that a different rate should apply. The presumptive tax could be based on average emissions for production of the item by either the exporting country or the importing country.

Implementing a US Carbon Tax: Challenges and Debates, a 2015 book compiling articles from the economics literature covering a range of design and implementation issues, edited by Ian Parry, Adele Morris and Roberton C Williams III.  Chapters cover these topics:

1. Carbon Taxes as Part of the Fiscal Solution

2. Choosing among Mitigation Instruments: How strong is the case for a US carbon tax?

3. Administration of a US Carbon Tax

4. Carbon Taxes to Achieve Emissions Targets: Insights from EMF 24

5. Macroeconomic Effects of Carbon Taxes

6. The Distributional Burden of a Carbon Tax: Evidence and implications for policy

7. Offsetting a Carbon Tax’s Burden on Low-Income Households

8. Carbon Taxes and Corporate Tax Reform

9. Carbon Taxes and Energy-Intensive Trade-Exposed Industries: Impacts and options

10. The Role of Energy Technology Policy alongside Carbon Pricing

11. Mixing It Up: Power sector energy and regional and regulatory climate policies in the presence of a carbon tax

12. Implications of Carbon Taxes for Transportation Policies

See also:

• What’s the best way to design a carbon tax? Brad Plumer (Washington Post, 3/13/12).
• Putting a Price on Carbon, A Handbook for U.S. Policymakers (World Resources Institute, 2015).
• Taxing Carbon: What, Why, and How (Tax Policy Center, Urban Institute & Brookings Institution, 2015).

Finally, the excerpts below from a 2007 memo from CTC to a House Ways & Means Committee member setting parameters for administering a federal carbon tax may be helpful.

Tax Upstream

We propose to tax fuels as far upstream as practicable, i.e., at the point where possession of the carbon-bearing fuel passes from the “producer” (e.g., coal mine; oil wellhead or tanker; gas wellhead) to the immediate next entity in the supply chain (e.g., coal shipper or utility; oil refiner or importer; natural gas pipeline). Presumably, each such transfer will be codified in a contract, or at least a bill of lading, specifying the attributes of the fuel.

This will minimize the number of points in the economy at which the tax would be levied. It will also simplify tax treatment of potential downstream carbon control technologies such as CCS (coal capture and sequestration), as discussed below.

Carbon Variability Requires Taxing by Btu, not by Fuel Weight or Volume

The tax rates will be stated in dollars per million Btu of heat content for each fuel. A more familiar approach based on physical quantities of fuel isn’t tenable, due to wide natural variations in carbon content within each fuel type. These variations are most stark for coal. A ton of lignite typically contains around 40% less carbon than a typical ton of bituminous coal, for example. To tax the two respective tons at the same dollar rate would be grossly unfair since combustion of the lignite ton releases 40% less carbon into the atmosphere than for the bituminous ton. Actual disparities would be even more pervasive and pronounced on account of variations in carbon content per ton within each major coal category (bituminous, subbituminous and lignite).

Fortunately, variations in carbon content of coals correspond fairly closely to variations in Btu content. This isn’t surprising, since it is the combustion of carbon into carbon dioxide that produces almost all of the heat energy released by burning any type of coal. Thus, lignite and bituminous coal differ by only 5% on average in carbon content per million Btu; differences in carbon per Btu among different batches of coals within the same category are probably less still.

Our approach, therefore, is to specify standard (and slightly different) tax rates for the three categories — bituminous, subbituminous and lignite — and to offer coal purchasers the option of applying for a lower tax rate than given in the standard schedule, on the basis of a coal assay performed and substantiated by a licensed, bonded entity, subject to random spot checks for accuracy.

Petroleum (Oil)

Taxing the carbon content of petroleum presents a different set of issues because of the dozen or more different petroleum products, each of which has its own carbon profile. For example, a barrel of residual fuel oil contains roughly 15% more carbon than a barrel of gasoline. This variability can be circumvented by (i) expressing the carbon tax for  petroleum in the same terms as the tax for coal, i.e., in dollars per million Btu of heat content, and (ii) levying the carbon tax on crude oil as possession passes from the producer to the refiner or pipeline. (Where one company owns both entities in the transaction, the tax can be charged at the point of transfer from the producing “business unit” tothe refining or pipeline “arm.”) This approach has the added virtue of maximizing incentives to refrain from flaring and venting of carbon-bearing gases and liquids and thus to maximize energy outputs per unit of carbon emitted.

At the same time, however, the United States imports significant quantities — several million barrels per day, overall — of refined petroleum products such as gasoline, heating oil, residual fuel oil and jet fuel. Because each has a distinct carbon profile, it is advisable to establish individual product tax rates, also in dollars per million Btu of heat content, to apply to imports of petroleum products. (Crude oil imports would be taxed at the standard “domestic” crude tax rate.)

The assay option noted above for coal, whereby coal purchasers could apply for a lower tax rate on the basis of a certified assay, and again subject to random spot checks for accuracy, would also be available to oil pipelines and refiners.

(Note: the final memo will contain rates for another 8-10 petroleum products; each will be in the vicinity of the range shown here for gasoline, resid and crude.)

Natural Gas

Natural gas exhibits little variability in carbon content per million Btu of heat content, and thus one figure should suffice, with the assay option still available to cover special cases. [We will check to ensure that LNG arriving by tanker has the same carbon-to-energy ratio.] The tax would be charged at the wellhead in order to maximize incentives to refrain from flaring.

Rebates for CO2 Control

The bill should provide the opportunity for partial or total rebate of the tax payments if the paying entity can prove that some or all of the carbon dioxide emissions will be kept from entering Earth’s atmosphere for millenia. This rebate approach has several virtues:

* It provides fair and workable treatment of “partial combustion” which will vary by user and use (e.g., unburned coal in ash that is returned to the mine for underground disposal; possibly also cement manufacturing, and plastics manufacture).

* It creates positive incentives to minimize emissions.

* It puts the burden on the fuel producer to demonstrate emissions avoidance (as opposed to a partial tax which allows the producer to reduce taxes unilaterally and burdens the government with substantiating a rebuttal case).

Procedures for producer documentation of CO2 avoidance and/or sequestration will be spelled out in the next iteration of this memo.

Tax Rates

Following are tax rates consistent with charging $50.00 per ton of carbon (not carbon dioxide) emitted. Consistent with the intent of phasing this level in over a five-year period, the rates for years 1 through 4 would be calculated by multiplying the rates in the table by 20%, 40%, 60% and 80%, respectively.

These amounts are derived in a spreadsheet developed by Charles Komanoff.

All rates are expressed in dollars per million Btu of fuel.

Bituminous coal	$1.40
Subbituminous coal	$1.45
Lignite	$1.47
Crude Oil	$1.12
Gasoline	$1.07
Residual Fuel Oil	$1.18
Natural Gas	$0.80

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).