Economists view taxing carbon dioxide emissions as the most efficient means of controlling the greenhouse gas. And carbon taxes have much support within energy policy circles as a December deadline approaches to reach a global climate deal in Paris.
In practice, however, the spread of carbon taxes has been slow and bumpy since Scandinavian countries introduced the first ones in the early 1990s. The problem is that while taxing carbon may spell efficiency to economists, for many lawmakers it can be political suicide. A carbon tax that passed in 2012 cost Australia’s Labour Party its parliamentary majority in 2013, and last year a triumphant Conservative Party scrapped the tax.
The World Bank counts 15 jurisdictions worldwide with carbon taxes, but only one is in North America: the Canadian province of British Columbia. Consumers and industries pay 30 Canadian dollars (U.S. $24) per ton of carbon dioxide on any fuels consumed in B.C. (This works out to about 21 cents on a gallon of gasoline, on top of the preëxisting federal gas taxes.)
B.C.’s carbon tax is revenue-neutral, with proceeds used to cut corporate and personal income taxes. And a special tax break offsets its otherwise regressive impact on low-income families, for whom energy represents a higher proportion of disposable income.
Evidence suggests that B.C.’s tax is reducing carbon combustion without stifling the economy. A five-year analysis by University of Ottawa researchers showed that B.C.’s consumption of petroleum fuel tracked that of the rest of Canada until the carbon tax began in 2008. Then per capita fuel consumption fell 17.4 percent in B.C. between 2008 and 2013, while it rose 1.5 percent in the rest of the country. B.C.’s economic growth, meanwhile, matched or outperformed that of the other provinces.
The U.S. Congressional Budget Office has estimated that a carbon tax starting at a relatively modest $20 per ton would raise $1.2 trillion in revenue in a decade. And other analyses suggest that the impact on greenhouse gas emissions could be comparable to the 30 percent reduction from power plants that the Environmental Protection Agency is seeking under its Clean Power Plan, which the agency hopes to finalize in August.
An alternative strategy for pricing carbon—carbon trading—could be more politically palatable and nearly as economically efficient.
An increasing number of jurisdictions are issuing or auctioning tradable carbon credits. Industries must acquire credits to emit CO2, so the total number of credits sets a cap on total emissions. Jurisdictions with carbon markets include the European Union, China, and California. More such markets could appear in the U.S. as a result of the EPA’s Clean Power Plan.
Europe’s pathbreaking carbon market experienced serious teething problems, with member states issuing too many emission credits, and undercutting the price of carbon emissions. But newer markets such as one shared by California and Quebec and one operated by nine northeastern U.S. states appear to have learned from their mistakes by, for example, setting a floor price for the market.
Setting a floor price, of course, turns the cap-and-trade system into a hybrid between market- and government-defined carbon pricing. If the market crashes, the floor price will kick in to maintain pressure on polluters and keep revenues flowing. (For the politicians’ sake, just don’t call it a tax.)
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