The carbon content of fuels is the focus of U.S. government strategy to encourage increased use of nonpolluting sources of energy and discourage use of fossil fuels by making them more expensive to use. Lawmakers discerned that placing a tax on fuels using carbon in any form will reduce their attractiveness to consumers. That is known as a carbon tax. A carbon tax is a tax on the carbon content of fossil fuels (coal, oil, gas). The Obama administration and Congress currently are considering whether to levy carbon taxes.
I. The Nature of Carbon Taxes
III. Proposed Legislation
The Nature of Carbon Taxes
The intent of carbon taxes is to reduce the amount of greenhouse gases, such as carbon monoxide from vehicles, emitted into the air. Doing so, it is hoped, will help keep intact the various layers of atmosphere supporting life on earth. Carbon taxes are an attempt to make polluters pay cash for the emissions they put into the air. The hope that people will not want to pay the increase to use gasoline, for example, and will seek alternative forms of energy for getting around town or running blenders in the kitchen, for example. Carbon is used to create computer chips, electricity and fuel cars, for example. Carbon taxes are now common throughout the world.
Economists and sustainability proponents have traditionally embraced the idea of having the polluter pay, which means that the polluter pays the costs of cleaning up the contamination. Although in theory this principle is attractive, it is very difficult to implement as an environmental protection policy. Enforcement is weak, coverage of polluters incomplete, and questions about whether money can ever compensate for environmental degradation all prevent environmental regulations from reducing carbon dioxide emissions quickly enough to avoid a global tipping point. The tipping point concept is itself debated in the scientific community. It means that once the atmosphere reaches a certain level of carbon dioxide, there will be no way to turn back to lower levels.
Carbon dioxide emissions are a global concern, with the United States leading the world in emissions. Scientists have been examining ways to sequester carbon dioxide under the ground or sea, as is being done by the state oil company of Norway. Many carbon tax advocates feel that the only way to reduce carbon dioxide emissions quickly enough to prevent the tipping point from arising is to tax carbon dioxide emissions. Sustainability advocates also like carbon taxes because they could help move society away from nonrenewable fuels like gas and oil. Critics point out that many of the results sought could be approached by reducing subsidies for nonrenewable energy sources like oil. Politically, a policy of reducing subsidies to nonrenewable energy sources has simply not happened, argue carbon tax proponents, and results are needed. Critics also say that the same results could be attained by use of a cap-and-trade program. Carbon proponents argue that traditional cap-and-trade programs apply only to generators of electrical energy, which account for only about 40 percent of carbon emissions; that carbon taxes are more transparent and easily understood than cap-and-trade arrangements between industry and government; and that carbon taxes will get quicker results in terms of decreased carbon dioxide emissions.
The first country to put a tax on atmospheric carbon dioxide emissions was Sweden in 1991, followed by Finland, Norway, and the Netherlands. Initially applied to combustion-only point sources over a certain size, the tax was equivalent to about $55 (U.S.) per ton of carbon dioxide emitted. Norway has extended the tax to off shore oil and gas production. They found it effective in spurring industry to find cost-efficient ways to reduce carbon dioxide emissions. The European Union began implementing a carbon tax in 2007 and intended to steadily increase the rate over time.
In early June 2010, a panel consisting of representatives of 12 federal agencies provided its climate change analysis to aid lawmakers with deciding what to include in climate change legislation. They estimated that each additional metric ton of carbon dioxide emitted into the earth’s atmosphere inflicts at least $21 in damage to agricultural productivity, human health, property damage from flooding, and the value of ecosystem loss due to climate change. According to the U.S. Environmental Protection Agency, the United States contributed 5.6 billion tons of carbon dioxide in 2008. That amounts to $117.6 billion in environmental damage today.
Carbon taxes have been controversial at the city, state, and federal levels. Some environmentally conscious communities have passed their own carbon tax, such as Boulder, Colorado. Boulder’s carbon tax applies only to electricity generation and is based on a dollar figure per ton of carbon emitted into the atmosphere. Advocates in Boulder claim the tax will raise almost $7 million over five years.
Direct environmental regulation of carbon by municipalities could occur rapidly in the United States, especially if state legislatures or Congress do not develop a carbon tax policy. Currently, about 330 U.S. mayors are signed on to the U.S. Mayors Climate Protection Agreement. Carbon tax debates could occur in many different localities. Many state legislatures are being exposed to the idea of carbon taxes. In the United States, Massachusetts has formed a study commission on tax policy and carbon emissions reduction. Advocates for a carbon tax say that it will reduce U.S. oil dependence. Nonrenewable energy sources account for much of the U.S. carbon waste stream. Natural gas is responsible for 22 percent, coal burning for 36 percent, and petroleum products for 42 percent of U.S. annual carbon emissions. If the carbon tax is enough to change pollution behavior, then advocates claim it will generate a large amount of revenue, some estimating between $55 billion and $500 billion a year depending on the carbon tax program.
Carbon taxes have made their way into congressional discussions and legislative proposals to reduce pollution. In April 2007 Democratic representatives Peter Stark from California and Jim McDermott from Washington introduced the Save Our Climate Act, a bill to reduce global warming by taxing carbon in fossil fuels. It remains with the House Ways and Means Committee, which has been discussing this proposal since its introduction. Stark is the primary sponsor of the legislation, with three cosponsors: Mc- Dermott and democrats Bob Filner of California and Raul Grijalva of Arizona.
The bill would charge $10 per ton of carbon in coal, petroleum, or natural gas. It would increase by $10 every year until U.S. carbon emissions decreased by 80 percent of 1990 levels. Stark maintains that this is the level most scientists claim is necessary to slow rapid climate change. Some environmental groups do not endorse it, some influential newspaper columnists do endorse it, and many are leery of anything called a tax. Accepting the concept of carbon taxes requires acceptance of global warming and climate change. These are environmental controversies in themselves. In the United States, they are also political controversies. Because of that, taxes for anything environmental may have difficulty getting enough support to become law.
There is now academic discussion of a global carbon tax. Economists focus on carbon taxes in some of their environmental and policy analyses. It is likely that many nations would find this appealing. Huge issues of enforcement in rich and poor nations would prevent this. No nation likes another nation to tax its citizens in their own country. Nonetheless, the small economics controversy of carbon taxes as environmental policy is receiving serious attention.
Carbon taxes shift environmental policy into the tax policy regulatory arena. Taxes are very strong policy devices and are used here to change the behavior of polluters. As such there are distributional impacts and other taxes to consider. Some have wondered, why not just prohibit carbon dioxide emissions or regulate them out of existence? Carbon taxes do appeal to the basic “polluter pays” principle but suffer some of the same problems. Who does the polluter pay? Who gets the benefit of the new carbon tax revenue? These questions fall into the same category of questions as avoiding carbon taxes by subsidizing renewable energy or withdrawing nonrenewable energy subsidies (for oil companies, for example). The political will of regulatory agencies and federal courts to tax carbon dioxide emissions is not strong enough to reduce the power of industry. The fundamental question is whether carbon taxes will actually reduce carbon dioxide emissions.
Robert William Collin and Debra Ann Schwartz
- The Carbon Tax Center, “Why Revenue-Neutral Carbon Taxes are Essential.” http://www.carbontax.org/
- Carraro, Carlo, and Domenico Siniscalco, The European Carbon Tax: An Economic Assessment. New York: Springer, 1993.
- Dellink, Rob B., Modeling the Costs of Environmental Policy: A Dynamic Applied General Model. Northampton, MA: Edward Elgar Publishing, 2005.
- FitzRoy, Felix, and Elissaios Papyrakis, An Introduction to Climate Change Economics. Sterling, VA: Earthscan, 2010.
- Handley, James, “Government Panel Estimates Cost of CO2 Pollution: $21/t and rising.” June 3, 2010. http://www.carbontax.org/blogarchives/2010/06/03/govt-panel-estimates-cost-of-c02-20t-and-rising/
- Library of Congress, “Bill Summary & Status, 111th Congress (2009–2010). H.R. 594. Save Our Climate Act of 2009.” http://thomas.loc.gov/cgi-bin/bdquery/z?d111:H.R.594:
- Park, Patricia D., Energy Law and the Environment. Boca Raton, FL: CRC Press, 2002. Serret, Yse, and Nick Johnstone, The Distributional Effects of Environmental Policy. Northampton, MA: Edward Elgar Publishing, 2006.