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, such as 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 a carbon tax or energy taxes related to their carbon content. For example, South Africa is considering the introduction of a carbon tax from 2016 onwards. In July 2014, Australia repealed its carbon tax, which was to transition to a cap-and-trade program.
In the United States, the last several Congresses have seen the introduction of carbon tax proposals. In the current Congress (2013-2014), five carbon pricing proposals have been introduced.
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 10 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 Congress.
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- Blog: Conservatives debate a carbon tax , June 20, 2013
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- Robert N. Stavins, The Problem of the Commons: Still Unsettled after 100 Years , American Economic Review, 101(1):(2011): 81–108. DOI:10.1257/aer.101.1.81