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Carbon tax and pricing greenhouse gas emissions: Research and perspectives

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For years — through many sessions of Congress — policymakers, researchers, environmentalists and energy companies have debated the merits of instituting a carbon tax across the U.S. economy. Such a tax, which would assign a fee to carbon dioxide emissions because of their detrimental impact on the atmosphere and contributions to climate change, has long appealed to a diverse mix of people of varying political ideologies, from groups on both the political left and right. This unusual appeal across party lines (of course, with many exceptions) mostly stems from the relative simplicity, in principle, of a uniform tax, in contrast to the more administratively complicated policy of lowering emissions by putting caps on the amount of carbon dioxide that can be released. Some conservative economists, for example, are attracted to it because it does not necessarily require Environmental Protection Agency (EPA) involvement and could be used to offset and lower personal and corporate income taxes, possibly facilitating broader tax reform. This issue of how revenue is used can divide even liberal groups, who generally support action on climate change.

Still, in a largely symbolic measure in June 2016, the U.S. House of Representatives voted 237-163 to oppose any future carbon tax proposals, and despite converts to the cause such as the energy giant ExxonMobil, there is no clear political pathway to passage as of yet. Currently, the U.S. government is attempting to reduce industrial greenhouse gas emissions largely through the Clean Power Plan, which aims to put constraints on power plants. That plan is currently under judicial review. At the global level, meanwhile, the Paris agreement through the United Nations mandates that each country set and achieve its own emissions targets, with a wide variety of policy mechanisms being used to achieve those goals.

Public opinion on a carbon tax remains the subject of some debate, and fact-checkers have been critical of some politicians’ claims about the public mood. It is worth noting that the way in which questions are framed, and the proposed uses of the revenue in question, can significantly affect responses; there are also large regional variations in the U.S.

Although a carbon tax may be comparatively simple in terms of implementation, administration and oversight, it does have several dimensions that are subject to debate: 1) the point at which carbon is taxed (whether at the upstream level of oil wells and coal mines, or more downstream at the pipeline and utility level); 2) the hotly debated issue of how to calculate the proper price on carbon dioxide; 3) how to distribute the tax revenue to maximize the policy’s intended impact; and 4), how to compensate for the fact that lower-income households tend to spend a greater percentage of their income on energy-related services, and therefore a carbon tax may operate as a “regressive” tax — depending on implementation.

There is a huge volume of research and scholarship on pricing carbon, and as the issue contains to gain attention — and more experiments take place around the world — even more economic- and energy-related analysis is being done. The following are useful papers and studies with a variety of perspectives:


“Effects of a Carbon Tax on the Economy and the Environment”
Congressional Budget Office, May 2013, Publication Number 4532.

Excerpt: “Fossil fuels currently account for roughly 90 percent of all energy used in the United States, so taxing them would impose costs on the economy. The ultimate economic effects of a carbon tax, however, would depend on how the revenues from the tax were used. Some uses, such as reducing federal budget deficits or lowering existing marginal tax rates, would reduce the total costs to the economy from a carbon tax. Other uses would be unlikely to lower those total costs, but they could target relief to groups that would bear a disproportionate share of the burden from a carbon tax.”


“Carbon Tax: Deficit Reduction and Other Considerations”
Ramseur, Jonathan L.; et al. Congressional Research Service, Sept. 17. 2012, R42731.

Excerpt: “Carbon tax revenues would vary greatly depending on the design features of the tax, as well as market factors that are difficult to predict. One study estimated that a tax rate of $20 per metric ton of CO2 would generate approximately $88 billion in 2012, rising to $144 billion by 2020. The impact such an amount would have on budget deficits depends on which budget deficit projection is used. For example, this estimated revenue source would reduce the 10-year budget deficit by 50 percent, using the 2012 baseline projection of the Congressional Budget Office (CBO). However, under CBO’s alternative fiscal scenario, the same carbon tax would reduce the 10-year budget deficit by about 12 percent. When deciding how to allocate revenues, policymakers would encounter key trade-offs: minimizing the costs of the carbon tax to ‘society’ overall versus alleviating the costs borne by subgroups in the U.S. population or specific domestic industries. Economic studies indicate that using carbon tax revenues to offset reductions in existing taxes — labor, income, and investment — could yield the greatest benefit to the economy overall. However, the approaches that yield the largest overall benefit often impose disproportionate costs on lower-income households.”


“Using the Market to Address Climate Change: Insights from Theory & Experience”
Aldy, Joseph E.; Stavins, Robert N. Daedalus, Spring 2012, Vol. 141, No. 2, Pages 45-60.

Excerpt: “Real-world experience with policies that price externalities illustrates the effectiveness of market-based instruments. So-called congestion charges in London, Singapore, and Stockholm have reduced traffic congestion in busy urban centers, lowered air pollution, and delivered net social benefits. The British Columbia carbon tax has reduced carbon dioxide emissions since 2008. The U.S. sulfur dioxide (SO2) cap-and-trade program has cut SO2 emissions from U.S. power plants by more than 50 percent since 1990, resulting in compliance costs one-half of what they would have been under conventional regulatory mandates. The success of the SO2 allowance trading program motivated the design and implementation of the European Union’s Emissions Trading Scheme (EU ETS), the world’s largest cap-and-trade program, focused on cutting CO2 emissions from power plants and large manufacturing facilities throughout Europe. The 1980s phasedown of lead in gasoline, which reduced the lead content per gallon of fuel, served as an early, effective example of a tradable performance standard. These positive experiences provide motivation to consider market-based instruments — carbon taxes, cap and trade, and clean energy standards — as potential approaches to mitigating greenhouse gas emissions.”


“British Columbia’s Revenue-neutral Carbon Tax: A Review of the Latest ‘Grand Experiment’ in Environmental Policy”
Murray, Brian; Rivers, Nicholas. Energy Policy, November 2015, Vol. 86. doi: doi:10.1016/j.enpol.2015.08.011.

Excerpt: “The primary objective of the tax is to reduce GHG emissions and essentially all studies show it is doing just that, with reductions anywhere from 5 percent to 15 percent below the counterfactual reference level. Some studies suggest that the tax has an amplified effect on fuel-consuming (emitting) behavior above what an equivalent change in fuel price would produce. Those studies provide a range of explanations of why this may be the case, and also find consistency with results on other taxes and policy interventions that produce outsize responses. A secondary goal of the carbon tax is fiscal reform — to enable the use of a tax on ‘bads’ (pollution) to displace a tax on ‘goods’ (labor and capital), with the attendant possibility that this might generate a double dividend — pollution reductions and economic growth. The evidence, while not decidedly pointing to a strong form of double dividend, tends to show no statistically significant effect at all on net growth for the province. At minimum, this suggests any negative economic effects are minimal. Note that these studies do not estimate the economic benefits from avoided climate change, which would also contribute to policy goals.”


“Distributional Effects of a Carbon Tax in Broader U.S. Fiscal Reform”
Mathur, Aparna; Morris, Adele C. Energy Policy, March 2014, Vol. 66. doi:10.1016/j.enpol.2013.11.047.

Excerpt: “Our results suggest that a carbon tax is regressive when using annual incomes as the base for the incidence measure, but less regressive when using consumption. Our analysis suggests that if policymakers direct about 11 percent of the tax toward the poorest two deciles, for example through greater spending on social safety net programs than would otherwise occur, then those households would on average be no worse off after the carbon tax than they were before. Of course, individual households within those groups might be better or worse off depending on their individual energy consumption patterns and participation in federal spending programs. In the tax swap simulations, we subtract the burden of other taxes that the carbon tax revenue could displace, such as the corporate and personal income taxes, and compute the net effect on households. We analyze revenue-neutral tax shifts under three assumptions about how those other taxes lower households’ capital and labor income: all borne by labor, all borne by capital, and a 50/50 split. Although all of the tax swaps lower the overall burden of the carbon tax (as a share of household income) on the poorest two deciles, tax swaps also exacerbate the regressivity of the carbon tax on the high end. This means that the benefit to the highest income households of the reduction in other taxes is greater than their share of the burden of the carbon tax.”


“Can a Unilateral Carbon Tax Reduce Emissions Elsewhere?”
Elliott, Joshua; Fullerton, Don. Resource and Energy Economics, January 2014, Vol. 36, Issue 1, Pages 6–21. doi: 10.1016/j.reseneeco.2013.11.003.

Excerpt: “Depending on parameters, we find that a carbon tax just on electricity in the U.S. can generate net negative domestic leakage (a reduction of emissions in other U.S. sectors). We then hypothesize a series of eight coalitions that might agree to impose the same carbon tax only on their electricity sectors. As the coalition becomes larger, the difference between domestic leakage and total leakage is reduced. The final and largest hypothetical coalition is the entire world, with only one region. If the carbon tax applies uniformly on all electricity production, and if electricity demand is relatively inelastic, then consumers may demand almost as much electricity, drawing non-fuel resources away from other goods, shrinking other sectors, and resulting in net negative leakage. For a non-global tax on carbon in electricity production, we find that net leakage can be negative within the countries imposing the tax but not across other countries. For a global carbon tax on electricity, net leakage can be near zero. These results show that the negative abatement resource effect must offset part or all of positive leakage.”

    Writer: | Last updated: July 5, 2016

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