The infamous carbon tax that has been around for nearly 50 years will soon be laid to rest. Not included in the recent infrastructure bill or other proposed climate policies, Biden has all but killed it. Despite having a large bipartisan support, with 67% of Congress in favor of some type of pricing on carbon emissions. Also, championed by leading economists as “the most cost-effective lever to reduce carbon emissions.”
While some believe that a carbon tax is a necessary path to reducing carbon dioxide (C02) emissions, others worry that it will cause unwanted economic distress and disproportionately hurt low-income families and small businesses.
In light of the current IPCC report, it’s important to take a closer look at the carbon tax and whether it could be an effective tool in helping us reach net-zero emissions. Here, we will explain how it works and review both sides of the argument for pricing C02 emissions.
How does a carbon tax work?
It’s a fairly simple idea, in order to reduce our carbon dioxide footprint we need to charge a tax on the amount of pollution being produced. The belief is, if you don’t want people to do something, the fastest way is to charge them for it. The proposed tax ranges anywhere from $5 to $150 on every ton of carbon released into the atmosphere.
An alternative way to price C02 emissions would be using a cap-in-trade program. An example of this, by the Regional Greenhouse Gas Initiative, a collation of 10 northeastern states, who were the first in the nation to implement a policy to force power plants to buy allowances for the amount of C02 they emit. Specifically, any fossil fuel power plant with a capacity over 25 megawatts, must obtain an allowance for each ton of carbon that they emit yearly. To counter these costs, power plants can do things like purchase allowances from quarterly auctions, other generators within the region, or offset projects.
The Case Against Carbon Tax
Similar to trickle-down economics, the main argument against a carbon tax is that the cost would penetrate through the economy, leading to a rise in prices on gas and airfare. Others feel that a carbon tax was never more than a talking point and never would have passed. The argument being that most Amenicans would not support something that adds that much additional costs to their day-to-day survival.
The global average carbon price is currently around $2 per ton of C02. Some economists argue that this number would need to be closer to $40-$80 U.S. dollars for it to be powerful enough in reducing emissions in line with The Paris Agreement. At this price, the cost would have a significant negative impact on all of society indiscriminately.
There is currently a good deal of opposition to carbon taxing. France’s gilets jaunes protests, for instance, erupted after a tax was implemented on energy products caused an increase in fuel prices. In recent years, other countries have also begun to protest including Mexico, Iraq, Ecuador, Brazil, and Chile.
In these countries, the poorest communities that already have the lowest carbon footprint, feel that they are being punished unfairly through carbon pricing. It would require high upfront costs for cleaner technologies (e.g., electric cars) currently making it inaccessible to large sections of the population.
The Case For Carbon Tax
Despite the additional cost of a carbon tax, many supporters feel that it stands to remain the most effective way to reduce C02 emissions. A benefit of a carbon tax would be that it provides new sources of public finance that will enable government investments in critical public priorities like healthcare, education, or infrastructure.
Recent research suggests that pricing carbon with either a carbon tax or cap-and-trade program actually has very little impact, positive or negative, on lower-income households. What really matters is how the policy is designed. They found that if a portion of carbon pricing revenues is dedicated to helping lower-income households, even a small portion of the revenue (perhaps 10%) would be sufficient to protect poor households from increasing energy prices.
Consistent with this, policymakers in countries like Canada, have tried to address unfair disparities in vulnerable populations by using the revenue raised from carbon taxes to subsidize green infrastructure (e.g., wind farms) and provide tax rebates or direct benefits to low-income households.
While pricing carbon emissions may be an efficient and affordable way for the U.S. to address climate change, policies must first be in place to ensure that the increasing cost of carbon-intensive products and services will not impact Americans who are unable to afford it.