Pricing carbon - What are the options?

Judging from the climate policy debate in Washington, one might conclude that carbon pricing is only a concept, or something being tried in Europe.

But in fact, 10 U.S. states (California and the Northeast states in the Regional Greenhouse Gas Initiative) have carbon trading programs. That means more than a quarter of the U.S. population lives in a state with a price on carbon. And a growing number of nations and provinces around the globe are turning to carbon pricing to cost-effectively reduce greenhouse gas emissions and encourage energy innovation.

Over the years, C2ES has closely examined the many ways available to price carbon, including a cap-and-trade system, an emissions tax, and a clean energy standard with tradable credits.

At an event today at the U.S. Capitol Visitor Center, (video) we’re taking a closer look at a few of the potential paths forward.

One is for states to use market-based mechanisms to implement upcoming federal carbon standards for power plants. The Environmental Protection Agency’s (EPA) proposed carbon standards  for existing power plants are expected June 2. One important issue is how much flexibility states will be given in choosing how to implement the standards. Could they, for instance, use a cap-and-trade program, a carbon tax, or other forms of carbon pricing?

A state-by-state or regional approach to carbon pricing would provide some of the benefits of market-based policies, but would not deliver the full economic efficiency that could be achieved through a comprehensive carbon pricing program at the federal level.

A new C2ES report, “A Carbon Tax in Broader U.S. Fiscal Reform: Design and Distributional Issues,” lays out the case for taxing something we don’t want – carbon pollution -- while simultaneously reducing taxes on things we do want --- like productivity and employment.

A well-designed carbon tax could improve the long-term U.S. fiscal situation. Carbon tax revenues could, for instance, be used to reduce payroll or corporate taxes. That would put more money in workers’ pockets, stimulate the economy, and address our need to reduce greenhouse gas emissions.

All environmental pollution, including greenhouse gas emissions, imposes costs. But these costs are not typically included in the price of the goods and services creating the damage. Market-based environmental policy, such as putting a price on carbon, would address this lack of transparency and help us with the energy innovation we need to avert the worst impacts of climate change.