Carbon Tax

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 [1]. 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 [2] 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 [3] (H.R. 6638 [4] 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.

C2ES Resources

• C2ES, Carbon Pricing Proposals of the 113th Congress [5], April 2013.
• C2ES,  Options and Considerations for a Federal Carbon Tax [6], February 2013.
• C2ES, Market Mechanisms: Understanding the Options [7], March 2012.
• C2ES, Australia's Carbon Price Mechanism [1], December 2011.
• C2ES, Cap and Trade vs. Taxes [8]. Climate Policy Memo, March 2009.
• C2ES, Tax Policies to Reduce Greenhouse Gas Emissions [9]. Congressional Policy Brief Series, November 2008.

External Resources

• Joseph Aldy, and Robert N. Stavins, The Promise and Problems of Pricing Carbon: Theory and Experience [10], Discussion Paper (Washington, DC: Resources for the Future, 2011).
• The Economics of Carbon Taxes [11], American Enterprise Institute, Brookings Institution, International Monetary Fund, and Resources for the Future, last modified November 13, 2012.
• Introduction – What is a Carbon Tax? [12], Carbon Tax Policy Center, last modified December 12 2012.
• Terry Dinan, Offsetting a Carbon Tax’s Costs on Low-Income Households [13],: Working Paper 2012-16 (Washington, DC: Congressional Budget Office, 2012).
• Kevin A. Hassett, and Gilbert E. Metcalf, An Energy Tax Policy for the Twenty-First Century [14], AEI Online (Washington, DC: American Enterprise Institute, 2007).
• Donald Marron, and Eric Toder, Carbon Taxes and Corporate Tax Reform [15], (Washington, DC: The Urban Institute and Urban-Brookings Tax Policy Center, 2013).
• Aparna Mathur, and Adele Morris, Distributional Effects of a Carbon Tax in the Context of Broader Fiscal Reform [16], (Washington, DC: Brookings Institution, 2012).
• Warwick J. McKibbin, Adele Morris and Peter J. Wilcoxen, The Potential Role of a Carbon Tax in U.S. Fiscal Reform [17], (Washington, DC: Brookings Institution, 2012).
• Adele Morris, The Many Benefits of a Carbon Tax [18], The Hamilton Project (Washington, DC: Brookings Institution, 2013).
• Jonathan Ramseur, Jane Leggett, and Molly Sherlock, Carbon Tax: Deficit Reduction and Other Considerations [19], CRS Report for Congress R42731 (Washington, DC: Congressional Research Service, 2012).
• Sebastian Rausch, and John Reily, Carbon Tax Revenue and the Budget Deficit: A Win-Win-Win Solution? [20], Joint Program Report Series Report 228 (Cambridge, MA: Joint Program on the Science and Policy of Global Change, 2012).
• Fiscal Reform and Climate Protection: Considering a U.S. Carbon Tax [21], Resources for the Future and the Peterson Institute for International Economics, last access March 9, 2012.
• Robert N. Stavins, The Problem of the Commons: Still Unsettled after 100 Years [22], American Economic Review, 101(1):(2011): 81–108. DOI:10.1257/aer.101.1.81