March 3, 2020

The Price is Right: what is a carbon tax?

Rachel Ashley & SANCHALI PAL

What the candidates really mean when they say “carbon tax”

14 states hold nominating contests on Super Tuesday to determine which candidates they will nominate in the 2020 Presidential Election.

As you’re getting ready to cast your ballot, consider that how you vote can be one of the most significant climate actions you take this year.

Grist has a great comprehensive guide to the candidates and their positions on various climate policies. All of these policies are important.

But we’d like to draw your attention to one policy in particular: a carbon tax. Studies show that putting a price on carbon would make a significant dent in the climate crisis. Many viable proposals exist, but we’re a fan of the carbon fee and dividend approach. More details below.

Although it may seem that a carbon tax is far in the future, significant momentum exists. Over 40 governments worldwide have already adopted a carbon tax. Among Americans, the Associated Press and NORC Center for Public Affairs Research found that 44% of people support a carbon tax.

Do you know where your candidate stands on a carbon tax? In our Super Tuesday special, the Joro team takes a look at different types of carbon taxes and where each candidate stands.

SERVED FRESH: CARBON TAXATION 3 WAYS


Cap and Trade (e.g. California)

Cap and Trade creates a cap on how much greenhouse gas a company can emit each year, by setting a number of allowances for each company. If a company emits more than they’re allowed to, they can purchase excess permits from other companies through an open market.

Pros:

  • Sets a specific limit on carbon emissions, which allows countries to align with international agreements like the Paris Climate Goals
  • Allows businesses to plan for gradual reduction in the cap over time
  • Theoretically allows the market to decide where emissions are cheapest to reduce in the system

Cons:

  • Price of carbon can be volatile
  • Ability to purchase emissions allowances from other companies and weak cap enforcement decrease incentive to reduce greenhouse gas emissions
  • Powerful industry players can lobby for exceptions to caps

Carbon Tax (e.g. Sweden, and many other countries)

A carbon tax directly sets a tax on each unit of greenhouse gas emitted. It creates an incentive for companies or households to reduce pollution when doing so costs less than paying the tax. Revenue collected from the tax goes to the government.

Pros:  

  • Relatively easy to implement
  • Sets a predictable price for carbon, helping businesses plan for associated costs
  • Revenue from carbon tax can be invested in clean energy technology and other stuff

Cons:  

  • Doesn’t guarantee a specific amount of emissions reduction, as picking the right price to incentivize action is very challenging
  • Will result in higher energy costs for US companies and consumers in the near term
  • All companies are penalized evenly for every unit of emissions: doesn’t account for the fact that different businesses may have different costs of emissions reduction
  • Could disproportionately hurt low-income communities if companies pass higher prices onto consumers if not paired with redistributive policies

Carbon Fee and Dividend (e.g. British Columbia, Canada)

Under a Carbon Fee and Dividend, the government sets a price on fossil fuels at their point of entry into the economy (e.g. as coal, oil, or natural gas). Prices are passed down, and companies in the supply chain pay more if they use more greenhouse gases. The revenue from the carbon tax is either fully or partially redistributed to households.

Pros:

  • Lower implementation costs because tax is only collected from polluters at the source
  • Has more bipartisan support than other proposals, and is endorsed by prominent economists, with potentially higher likelihood of being passed
  • Households are compensated for higher energy prices with a dividend or rebate

Cons:

  • Will result in higher energy costs for US companies and consumers in the near term
  • Hasn’t been implemented in the US before: uncertainty due to lack of precedent

ORDERS UP: THE CANDIDATES

Horses still in

Biden: Joe supports a Carbon Tax, proposing he will push congress to pass legislation by 2025.

Bloomberg: Mike plans to set emissions limits on energy production facilities (suggesting a “quota” system stricter than Cap and Trade).

Sanders: Bernie has been an early proponent of a Carbon Tax, but recently has de-emphasized taxation, calling it one of many measures needed alongside litigation and reduction of subsidies.

Warren: Liz supports putting a price on carbon, emphasizing that companies should pay for emissions, although she doesn’t specify a specific taxation approach.

Trump: Donald does not support putting a price on carbon. While in office, he has slashed estimates of the social cost of carbon, sued California over Cap and Trade, and threatened retaliation against the EU over potential carbon taxes on US goods.

VP Candidates-in-Waiting

Buttigieg: Pete supports a Carbon Fee and Dividend to reduce emissions and plans to extend tax credits for carbon capture.

Klobuchar: Amy would push to set a price on carbon, but has not specified if she’d support a Cap and Trade or Carbon Tax approach.

Steyer: Tom supports a Cap and Trade program to limit the greenhouse gases emitted in any given year.

________________

Want more info on the implications of a carbon tax? Check out the NYT’s global map of carbon taxation or Columbia University Center on Global Energy Policy’s handy guide.

Stay in the loop.

Subscribe to our bi-weekly newsletter to get the latest on climate news and action tips.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.