What the heck is a carbon tax?
The carbon tax has been a largely elusive form of public policy, escaping the same vitriol other climate solutions get while also receiving varied support from economists across the ideological aisle. Despite this, implementation has been largely non-existent on a state or federal level in the United States. And even with broad support, many people do not quite understand what a carbon tax is or how it works. This paper aims to explain what a carbon tax is, identify proposed and ongoing variations, and discuss the benefits and drawbacks of implementation.
The climate crisis is here. In the past several decades, changes in precipitation patterns, rising temperatures, rising seas, and stronger hurricanes have become more and more common. And these effects could cost the United States $224 billion more per year by the end of the century. Because of this, economists are trying to figure out ways to curb carbon emissions to such an extent that it reduces the overall impact of climate change. And one of the solutions proposed is called a carbon tax. The first country to implement a carbon tax was Finland in 1990, and was soon followed by other European countries like Sweden and Norway. In total today, 25 countries around the world have implemented a carbon tax.
The premise behind the tax is fairly simple: businesses or industries that produce carbon dioxide and release it into the atmosphere are to be charged a tax. The idea, according to the Carbon Tax Center, is that by taxing industries for releasing carbon into the air, it incentivizes investment into carbon neutral technology and over time helps make fossil fuels obsolete. Countries implement a carbon tax by essentially placing a cost on the amount of carbon per tonne put into the air.
Another somewhat more complicated version of a carbon tax exists. Cap-and-Trade works by placing a “cap” on carbon emission allowed per year. In order to ensure companies stay accountable to that cap, governments issue permits and decrease the permits given out year after year. Companies that do not reach their carbon limit can then sell (or “trade”) their permits to other, carbon-dirtier companies.
Cap-and-trade has worked before. Caps were previously put on sulfur-dioxide, which was known to cause acid rain. After debates over implementation, provisions were written into the 1990 Clean Air Act that implemented the same cap-and-trade system we see being used for carbon. At 1/4th the expected cost, sulfur emissions went down faster than expected, according to the Environmental Defense Fund.
Despite this, studies show that cap-and-trades on carbon may not work. In an analysis done by ProPublica, a non-profit investigatory newsroom, it found that California’s cap and trade system has actually increased carbon emissions within the oil and gas industry. The study even notes a government report by the California Legislative Analyst’s Office that states, “cap and trade is likely not having much, if any, effect on overall emissions.” The report adds that the primary reason for California meeting its emissions target was the economic slowdown caused by the great recession of 2008. Another article by the Cato Institute titled Why Cap and Trade Doesn’t Work added that the knowledge of eventual tax increases on oil companies in the future could actually incentivize polluters to produce as much carbon as possible now — before it is too expensive.
Carbon taxes are somewhat better because taxes are a more stable price than volatile markets for permit sales. The other advantage is that cap and trade permits are initially offered for free, leading the government to lose out on potential tax revenue. Revenue that it could have used to fund clean energy research, or as a tax rebate for a country’s citizens.
Carbon taxes are not without their own fault, though. Because carbon taxes affect businesses and industries, those companies then pass the cost down to the consumer. In addition, most product costs are universal regardless of the consumer’s income. Therefore, regressive taxes like this can unfairly target lower-income communities. For example, there are two Uncles. Uncle Joe is a working class laborer who devotes 10% of his income on energy. Uncle Bob is a handsomely paid lawyer who only has to devote 2% of his income on energy. When a universal tax is put on gasoline prices, gas prices go up 20 cents. Regardless of both Uncle’s take home pay, they still pay the same amount in gas. This regressive income tax hurts Uncle Joe more than it hurts Uncle Bob.
One possible solution to this issue is by a tax rebate. The Citizens Climate Lobby, one of the largest backers of carbon taxes across the country, suggests an equal carbon dividend (in the form of a monthly check) for every American who pays into the carbon tax. Doing so would increase disposable income, and therefore add liquidity to the economy.
Another possible solution is to re-invest some of the tax revenue from carbon taxes into clean energy initiatives. This has two benefits: 1. Investment in clean energy does away with polluters in black and brown communities — where the effects of pollution are most felt. 2. Black and brown communities therefore save on medical costs in the long-term by reducing hazardous health effects of coal plants and oil refineries.
Federally, only one bill has passed either house of congress. The American Clean Energy and Security Act was the American version of the cap and trade policies already established in the European Union. After passing the House of Representatives, it was never brought for debate in the Senate. In states like Hawaii, sweeping carbon tax legislation is taking place. During the 2020 legislative session, a version of the Citizens Climate Lobby carbon tax bill was proposed, passed by the Senate, and ultimately killed in the House of Representatives in its final committee hearing. Bill 3150 SD2 set a tax rate of $40/metric ton of carbon emissions in 2021, incrementally increasing the tax rate over time so that, in 2030, the tax rate shall be equivalent to a carbon price of $80/metric ton of carbon emissions. The bill is likely to be re-introduced for the third time this coming January.
Another question often posed by environmental groups is the effectiveness of carbon pricing. Although studies have shown that carbon pricing has been effective at decreasing carbon emissions, it does not decrease emissions enough to reach the necessary reductions in carbon emissions that the Intergovernmental Panel on Climate Change requires. To reach such reductions, several other initiatives must take place alongside carbon pricing. Ending government subsidies to fossil fuels and subsidizing clean energy have been commonly touted additions.
Some say that carbon taxes can be bad for the economy, noting possible job losses associated with increasing taxes, incomes losses, and loss in gross domestic product (GDP). However, analysis of the 31 countries in the European Union’s carbon pricing system by G. Metcalf and J. Stock reveals “…no evidence of adverse effects on GDP growth or total employment.” Although carbon pricing in and of itself will not solve the climate crisis, its deliberate focus on equity, proven effectiveness, and economic viability prove it to be another common sense solution to a very big problem.
