Climate policy requires managing a transition between existing energy systems and emerging alternatives—balancing economic efficiency, reliability, and long-term environmental goals.
Summary
We support:
- Imposing a $100/ton carbon tax on domestic production
- Applying comparable tariffs on imports from countries without similar policies
- Using a portion of the revenue to subsidize direct carbon capture and sequestration
- Using a portion of the revenue to fund basic research on alternative energy and geo-engineering
- Using the residual to reduce the deficit
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Background and Detailed Proposal
Climate change is a global problem. Any effective response will require international cooperation. We believe that a market-based approach can achieve meaningful reductions in emissions at a manageable economic cost.
The Proposal
We propose that the U.S. impose a carbon tax of $100/ton (with comparable taxes on other greenhouse gases). We should attempt to persuade as many other countries as possible to impose the same taxes on themselves. Canada and the European Union have already begun this process. This $100/ton tax is significantly less than the Environmental Protection Agency’s estimate of the social cost of carbon emissions of $190/ton.
Direct Consumer Economic Context
For context, such a tax would result in about a $1.00 per gallon increase in the price of gasoline. This may sound politically challenging, but remember that electric vehicles (EVs) and plug-in hybrid vehicles would largely avoid this expense. Even without the subsidies for EVs, which go away with this policy, the total life cycle cost of EVs is now less than the total cost of gas powered vehicles, when you take into account current gas prices and lower maintenance expenses.
Use of the Proceeds
A $100/ton carbon tax would initially raise about $550 billion in revenue. This amounts to about a quarter of the current deficit, after accounting for the revenue that might be lost to payments for carbon capture and research subsidies.
In the U.S., these revenues should be used for:
- Subsidizing direct carbon capture and sequestration (removing CO₂ directly from the atmosphere)
- Subsidizing basic research in alternative technologies including geo-engineering
- Using the residual to reduce the deficit
Carbon capture at power plants is already incentivized by the carbon tax itself, since capturing emissions avoids the tax. Subsidies are therefore primarily needed for direct capture from the atmosphere.
We recognize the concern that additional revenue may lead to additional spending. Because money is fungible, formal rules cannot fully guarantee that these revenues will reduce the deficit. However, explicitly dedicating a portion of the proceeds to deficit reduction increases transparency and makes it more difficult, politically, to redirect those funds to new spending.
Some people suggest returning a portion of the revenues as a per capita income transfer to offset the distributional impact of the tax. That has some appeal politically, but given the seriousness of the current debt crisis, we are not embracing this alternative.
Effectiveness
Dealing with climate change is possible. A number of sources agree that a global carbon tax could significantly reduce emissions at a manageable economic cost.
- Resources for the Future (RFF) indicated that a $22/ton tax, enacted in 2017, ($49 in 2024 dollars), would have allowed the U.S. to meet its commitments under the Paris Agreements. (1)
- The International Monetary Fund (IMF) has recommended a $75/ton carbon tax.
- A poll of a group of about 30 climate economists from around the world, taken ahead of the COP26 summit in Glasgow, produced a median estimate of $100/ton in order to reach net zero emissions by 2050. (2)
The assumption behind all of these estimates is that the same tax would be applied globally.
Addressing the Global Character of the Problem
To encourage other countries to impose these taxes, the U.S. should place tariffs on goods from countries who do not impose greenhouse gas taxes on themselves, that are proportional to the estimated greenhouse gas emission content of the imported goods. If a significant number of other countries can be persuaded to adopt the carbon tariff approach, then the impact of these tariffs will fall primarily on non-complying countries that are exporting carbon intensive goods. This approach should rapidly result in a global, or nearly global, carbon tax of $100/ton. Each nation could use the revenues from the tax for its own purposes. This would act as an incentive to impose a carbon tax rather than having it imposed on their exports.
Political Resistance
There is resistance to carbon taxes across the political spectrum, for a variety of reasons, including:
- Skepticism that the problem of climate change is serious, or even real
- Antipathy toward all tax proposals
- Concern that lower income groups would bear a large burden
- Preference for targeted subsidies because they would be funded by taxes on those with higher incomes
No one likes taxes and all taxes distort economic activity, but the key question is: what is the most efficient and equitable way to fund government?
Distribution of the cost across income groups
For many of those who accept that the problem is serious, the targeted approach has some appeal in terms of how the burden is distributed. Energy consumption rises with income, but it does not do so proportionately. Low income households spend roughly 3% of their income on energy, high (top 20%) earners spend roughly 6%. As a result, while higher earners may well pay more of their incomes on a carbon tax, it will be a smaller percentage of their income. In the case of the targeted approach, using taxpayer-funded subsidies, the burden falls disproportionately on higher earners.
The problem with the targeted approach is that it is extremely inefficient and that it will therefore require a far greater economic impact in terms of limiting economic growth than would a simple tax and tariff solution.
Carbon tax vs. Cap and Trade
We favor a carbon tax over a cap and trade system for a number of reasons, including: ease of administration; applicability in most sectors (cap and trade works in the power generation and cement industries, but not in other sectors like transportation); and, the ability to raise revenues.
An ‘All of the Above’ Strategy
The carbon tax will encourage a shift away from oil and traditional coal-fired power plants and toward natural gas and coal with capture and sequestration. Legacy coal fired power plants are unlikely to be abandoned globally, because they are inexpensive to operate. Retro-fitting them to reduce their carbon emissions may be our best hope to curb climate change and sustain economic growth. The tax provides the incentive for the private sector to perform the retro-fitting.
Government policy may also be necessary to facilitate the growth of nuclear power. The point is not to subsidize nuclear power, but rather to remove governmental impediments to its use. The carbon tax by itself will provide a market-based subsidy for nuclear and all other carbon free or low carbon technologies including solar, wind, and geothermal energy. The carbon tax would also provide an implicit subsidy for electric and hydrogen vehicles.
A carbon tax accepts the fact that eliminating all fossil fuel consumption is neither practical nor desirable.
Other Policies that Don’t Require International Cooperation
The taxes on coal, oil, and natural gas (described in the Environmental Policy section, for non-climate-change environmental reasons) would also shift energy demand in the U.S. toward less carbon intensive technologies.
The movement toward real-time pricing of electric power, described in the section on Energy Policy will also provide an economically efficient, market-based, incentive for solar power.
The Developing World
Countries like China and India that are integrated into the world economy through trade will find that it is in their interest to impose carbon taxes on themselves and will, as a consequence, reduce their emissions of greenhouse gases. Other countries, like many in Africa, that are not significant exporters, may find that they would rather enjoy cheap fossil fuels and accept a disadvantage in terms of international trade.
Rather than relying on direct financial transfers, it might be a better strategy to subsidize basic research and technology transfer to the developing world to make the transition to a less carbon-intensive economy cheaper.
Geo-Engineering and other R&D
The downside of geo-engineering to reverse climate change is that it involves large scale experiments with the environment. The upside is that it may be possible for the U.S., acting alone, or with a few allies, to have a major impact on solving the problem, or at least buy some time.
One possible geo-engineering approach, that does not require risky experiments with the environment, involves carbon capture and sequestration directly from the atmosphere. Unfortunately, while technologically feasible, this technology is far too expensive to be practical at this time.
We would support government investment in R&D on these alternatives and on basic research on low carbon energy technologies.
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