The Carbon Tax ‘Til Now

Even such different proposals for systems to reduce greenhouse gas emissions (GhGs) as Cap&Trade or Cap&Dividend have something crucial in common: A cap on emissions. Without a cap, the effectiveness of any GhG-cutting plan has to be in question.

Not so, say advocates of the carbon tax, because it is a veritable law of economics that taxes change behavior. Therefore, it can be assumed within a reasonable certainty that a carbon tax will change emitters’ behaviors.

Advocates are so certain of a carbon tax’s effectiveness that they believe it will eventually overcome politicians’ and voters’ repugnance to the T word (any new tax).

Carbon Taxes: A Review of Experience and Policy Design Considerations, from researchers at the U.S. Department of Energy (DOE) National Renewable Energy Laboratory (NREL), reviews the nearly 20-year history of carbon taxes in the U.S. and around the world and analyzes the design and effectiveness of these emissions reduction policies.

Their conclusion is that they are not sure.

Some carbon taxes… ::continue::

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…have been associated with reduced GhGs but the reductions came in a context of other policy efforts so it is not clear which policies accounted for what part of the reductions.

Other carbon taxes are too new to have definitive impacts.

What the researchers suggest, based on larger economic principles, is that higher taxes can change behaviors and lower taxes can generate revenues to fund New Energy and Energy Efficiency programs, so it depends on “the needs of the implementing jurisdiction.”

Questions any carbon tax design must consider: (1) which sectors to tax, (2) where to set the tax rate, (3) how to use tax revenues, (4) what the impact will be on consumers, and (5) how to ensure emissions reduction goals are achieved

For a complete description of the strengths and weaknesses of the leading alternatives in the U.S. to a carbon tax, see CAP&DIVIDEND, CAP&TRADE OR CAP THE DEBATE?

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This post is based on Carbon Taxes: A Review of Experience and Policy Design Considerations by Jenny Sumner, Lori Bird, and Hillary Smith, December 2009, National Renewable Energy Laboratory

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