The most basic form of a market-based policy is a tax that sets a price on each unit of pollution. A tax on pollution provides an incentive for an entity to reduce the quantity of pollution produced by changing its processes or adopting new technology. Taxes on greenhouse gases (GHGs) can come in two broad forms: an emissions tax, which is based on the quantity of emissions an entity produces; and a tax on goods or services that are generally GHG-intensive (e.g. a carbon tax on gasoline).
A pollution tax differs from a cap-and-trade system in that the latter places a quantitative limit on emissions while the former places a limit on the price of the pollutant. Both policy instruments can be equally effective in reducing pollution.
Internationally, a number of countries, along with a number of local and regional governments, have implemented carbon taxes or energy taxes that are related to their carbon content. Most recently, in July 2012, Australia implemented a fixed price cap-and-trade program. This hybrid approach will operate essentially as a carbon tax at first, then in three years transition to a cap-and-trade program (under which price will fluctuate based on market supply and demand).
In the United States, the last several Congresses saw the introduction of carbon tax proposals. In February 2012, Reps. Henry Waxman (D-CA) and Ed Markey (D-MA) – authors of the first cap-and-trade bill to pass a chamber of Congress – wrote an op-ed calling for the examination of a carbon tax to address the current fiscal challenges and environmental problems. Most recently, in August 2012, Rep. Jim McDermott (D-WA) introduced his Managed Carbon Price Act of 2012 (H.R. 6638 of the 112th Congress) proposal which would tax greenhouse gas emissions, and would use part of the revenue to pay down the federal deficit and refund the rest back to taxpayers.
There has been increased attention on a revenue neutral carbon tax as a way to pay for reductions in taxes on productive activities, such as income tax, or tax territoriality reform, and offsetting those reductions by taxing harmful activities. Recent studies estimate a $20 tax on carbon could raise between $1.2 to $1.5 trillion in the next ten years.
Neither Congressional leadership nor President Obama have expressed interest in a carbon tax. Nevertheless, the need for new revenues to address the looming fiscal shortfall may shape the discussion of a carbon tax in the current Congresses.
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