Front Matter

Next Chapter

Front Matter

Language:: English

Keywords:: BOOK; policy; cost; price; firm; federal budget budget deficit; carbon tax revenue; tax loophole; fuel excise taxes; fuel economy standard; Carbon tax; Greenhouse gas emissions; Personal income; Corporate taxes; Corporate income tax; Global; Africa; North America

Download PDF

Abstract

“Government debt and global climate change are two of the great problems of our time. Carbon taxation uniquely has the potential to address both. But as always the devil is in the details. This important volume is lucid, comprehensive and acute on all the issues bearing on the decision to implement carbon taxes. It will be an essential resource in the debates to come.”

Larry Summers, President Emeritus and Charles W. Eliot Professor, Harvard University, USA

“There is little doubt in my mind that for dealing for global climate change, the best policy includes a tax on carbon emissions. This new volume edited by Parry, Morris, and Williams dives into the details to help make this simple and sensible policy a reality.”

N. Gregory Mankiw, Professor of Economics, Harvard University, USA

“This important and timely book of papers by a distinguished bipartisan group of economists lays out the case for a carbon tax as the most effective and efficient way to reduce carbon emissions while generating a large fiscal dividend. The papers tackle the most challenging questions about a carbon tax including its size, and how to offset its potential negative effects on low-income households, economic growth and competitiveness. The book’s overarching conclusion is that a well-designed carbon tax would have significant benefits for the environment, for the long-run fiscal outlook, and for economic growth.”

Laura Tyson, Professor of Business Administration and Economics, and Director, Institute for Business & Social Impact, Haas Business and Public Policy Group, University of California at Berkeley, USA

Implementing a us Carbon Tax

Although the future extent and effects of global climate change remain uncertain, the expected damages are not zero, and risks of serious environmental and macroeconomic consequences rise with increasing atmospheric greenhouse gas concentrations. Despite the uncertainties, reducing emissions in the United States now makes sense, and a carbon tax is the simplest, most effective, and least costly way to do this. At the same time, a carbon tax would provide substantial new revenues which may be badly needed, given historically high debt-to-GDP levels, pressures on social security and medical budgets, and calls to reform taxes on personal and corporate income.

This book is about the practicalities of introducing a carbon tax in the United States, set against the broader fiscal context. It consists of 13 chapters, written by leading experts, covering the full range of issues policymakers would need to understand. These include, for example, the revenue potential of a carbon tax, how the tax can be administered, the advantages of carbon taxes over other mitigation instruments, the environmental and macroeconomic impacts of the tax, and opportunities for reforming broader fiscal, regulatory, and technology policies.

A carbon tax can work in the United States. This volume shows how, by laying out sound design principles and feasible solutions to specific implementation challenges.

Ian Parry is Principal Environmental Fiscal Policy Expert in the Fiscal Affairs Department of the IMF.

Adele Morris is a Fellow and Policy Director for Climate and Energy Economics at the Brookings Institution.

Roberton C. Williams III is a Professor in the Department of Agricultural and Resource Economics at the University of Maryland, Senior Fellow and Director of Academic Programs at Resources for the Future, and a Research Associate of the National Bureau of Economic Research.

Routledge Explorations in Environmental Economics

Edited by Nick Hanley

University of Stirling, UK

1 Greenhouse Economics

Value and ethics

Clive L. Spash

2 Oil Wealth and the Fate of Tropical Rainforests

Sven Wunder

3 The Economics of Climate Change

Edited by Anthony D. Owen and Nick Hanley

4 Alternatives for Environmental Valuation

Edited by Michael Getzner, Clive Spash and Sigrid Stagl

5 Environmental Sustainability

A consumption approach

Raghbendra Jha and K.V. Bhanu Murthy

6 Cost-Effective Control of Urban Smog

The significance of the Chicago cap-and-trade approach

Richard F. Kosobud, Houston H. Stokes, Carol D. Tallarico and Brian L. Scott

7 Ecological Economics and Industrial Ecology

Jakub Kronenberg

8 Environmental Economics, Experimental Methods

Edited by Todd L. Cherry, Stephan Kroll and Jason F. Shogren

9 Game Theory and Policy Making in Natural Resources and the Environment

Edited by Ariel Dinar, José Albiac and Joaquín Sánchez-Soriano

10 Arctic Oil and Gas

Sustainability at risk?

Edited by Aslaug Mikkelsen and Oluf Langhelle

11 Agrobiodiversity, Conservation and Economic Development

Edited by Andreas Kontoleon, Unai Pascual and Melinda Smale

12 Renewable Energy from Forest Resources in the United States

Edited by Barry D. Solomon and Valeria A. Luzadis

13 Modeling Environment-Improving Technological Innovations under Uncertainty

Alexander A. Golub and Anil Markandya

14 Economic Analysis of Land Use in Global Climate Change Policy

Thomas Hertel, Steven Rose and Richard Tol

15 Waste and Environmental Policy

Massimiliano Mazzanti and Anna Montini

16 Avoided Deforestation

Prospects for mitigating climate change

Edited by Stefanie Engel and Charles Palmer

17 The Use of Economic Valuation in Environmental Policy

Phoebe Koundouri

18 Benefits of Environmental Policy

Klaus Dieter John and Dirk T. G. Rübbelke

19 Biotechnology and Agricultural Development

Robert Tripp

20 Economic Growth and Environmental Regulation

Tim Swanson and Tun Lin

21 Environmental Amenities and Regional Economic Development

Todd Cherry and Dan Rickman

22 New Perspectives on Agri-Environmental Policies

Stephen J. Goetz and Floor Brouwer

23 The Cooperation Challenge of Economics and the Protection of Water Supplies

A case study of the New York City Watershed Collaboration

Joan Hoffman

24 The Taxation of Petroleum and Minerals

Principles, problems and practice

Philip Daniel, Michael Keen and Charles McPherson

25 Environmental Efficiency, Innovation and Economic Performance

Massimiliano Mazzanti and Anna Montini

26 Participation in Environmental Organizations

Benno Torgler, Maria A. García-Valiñas and Alison Macintyre

27 Valuation of Regulating Services of Ecosystems

Pushpam Kumar and Michael D. Wood

28 Environmental Policies for Air Pollution and Climate Change in New Europe

Caterina De Lucia

29 Optimal Control of Age-Structured Populations in Economy, Demography and the Environment

Raouf Boucekkine, Natali Hritonenko and Yuri Yatsenko

30 Sustainable Energy

Edited by Klaus D. John and Dirk Rubbelke

31 Preference Data for Environmental Valuation

Combining revealed and stated approaches

John Whitehead, Tim Haab and Ju-Chin Huang

32 Ecosystem Services and Global Trade of Natural Resources

Ecology, economics and policies

Edited by Thomas Koellner

33 Permit Trading in Different Applications

Edited by Bernd Hansjürgens, Ralf Antes and Marianne Strunz

34 The Role of Science for Conservation

Edited by Matthias Wolff and Mark Gardener

35 The Future of Helium as a Natural Resource

Edited by W. J. Nuttall, R. H. Clarke and B. A. Glowacki

36 The Ethics and Politics of Environmental Cost-Benefit Analysis

Karine Nyborg

37 Forests and Development

Local, national and global issues

Philippe Delacote

38 The Economics of Biodiversity and Ecosystem Services

Edited by Shunsuke Managi

39 Analyzing Global Environmental Issues

Theoretical and experimental applications and their policy implications

Edited by Ariel Dinar and Amnon Rapoport

40 Climate Change and the Private Sector

Scaling up private sector response to climate change

Craig Hart

41 Game Theory and Fisheries

Essays on the tragedy of free for all fishing

Ussif Rashid Sumaila

42 Government and the Environment

The role of the modern state in the face of global challenges

Edited by Laura Castellucci

43 Is the Environment a Luxury?

An inquiry into the relationship between environment and income

Edited by Silvia Tiezzi and Chiara Martini

44 Implementing a US Carbon Tax

Challenges and debates

Edited by Ian Parry, Adele Morris and Roberton C. Williams III

Implementing a us Carbon Tax

Challenges and debates

Edited by Ian Parry, Adele Morris and Roberton C. Williams III

First published 2015

by Routledge

2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN

and by Routledge

711 Third Avenue, New York, NY 10017

Routledge is an imprint of the Taylor & Francis Group, an informa business

Nothing contained in this book should be reported as representing the views of the IMF, its Executive Board, member governments, or any other entity mentioned herein. The views expressed in this book belong solely to the authors.

The right of the editors to be identified as the authors of the editorial material, and of the contributors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.

All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Library of Congress Cataloging-in-Publication Data

Implementing a US carbon tax: challenges and debates / edited by Ian Parry, Adele Morris and Roberton Williams.

pages cm

1. Carbon taxes—United States. 2. Emissions trading—United States. 3. Climatic changes—Law and legislation—United States. I. Parry, Ian, editor. II. Morris, Adele Cecile, 1963–editor. III. Williams, Roberton C., 1972– editor.

HJ5321.I47 2015

363.738’7460973—dc23

2014022330

ISBN: 978-1-138-81415-8 (hbk)

ISBN: 978-1-138-82536-9 (pbk)

ISBN: 978-1-315-74768-2 (ebk)

Typeset in Bembo

by Apex CoVantage, LLC

List of figures
List of tables
Foreword
Contributors
Summary for policymakers
Glossary of technical terms and abbreviations
1 Carbon taxes as part of the fiscal solution
William G. Gale, Samuel Brown, and Fernando Saltiel
2 Choosing among mitigation instruments: how strong is the case for a US carbon tax?
Ian Parry
3 Administration of a US carbon tax
Jack Calder
4 Carbon taxes to achieve emissions targets: insights from EMF 24
Allen A. Fawcett, Leon C. Clarke, and John P. Weyant
5 Macroeconomic effects of carbon taxes
Roberton C. Williams III and Casey J. Wichman
6 The distributional burden of a carbon tax: evidence and implications for policy
Adele Morris and Aparna Mathur
7 Offsetting a carbon tax’s burden on low-income households
Terry Dinan
8 Carbon taxes and corporate tax reform
Donald B. Marron and Eric Toder
9 Carbon taxes and energy-intensive trade-exposed industries: impacts and options
Carolyn Fischer, Richard Morgenstern, and Nathan Richardson
10 The role of energy technology policy alongside carbon pricing
Richard G. Newell
11 Mixing it up: power sector energy and regional and regulatory climate policies in the presence of a carbon tax
Dallas Burtraw and Karen L. Palmer
12 Implications of carbon taxes for transportation policies
Ian Parry and Kenneth A. Small
13 Comparing countries’ climate mitigation efforts in a post-Kyoto world
Joseph E. Aldy and William A. Pizer
Conclusion
Adele Morris, Ian Parry, and Roberton C. Williams III
Index

Figures

Tables

Foreword

Accumulation of carbon emissions and other greenhouse gases in the atmosphere is expected, on present trends, to warm the planet by around 3.5°C by the end of the century, posing considerable risks (not least from instabilities in the global climate system) to the United States and all countries alike. While we are seeing fledgling efforts to enact comprehensive carbon mitigation policies in China, the European Union, and elsewhere, the world inevitably looks to the United States for leadership in this (as in other) areas.

As widely recognized, carbon pricing policies are potentially, by far, the most effective instruments for reducing emissions, while providing the longer-term price signals needed to advance clean technology investments. At the same time, pricing policies could contribute substantially to easing fiscal problems in the United States. In fact, the US tax system is ripe for fundamental overhaul. Not only is the long-term fiscal outlook unsustainable on current policies (with projections of ever rising debt-to-GDP ratios) but numerous loopholes erode the base of individual and company taxation, keeping tax rates unnecessarily high and causing all sorts of distortion to spending and investment behavior.

Following the failure to enact federal emissions trading legislation, and growing appreciation of the need for comprehensive tax reform, debate, at least in informal policy circles, has shifted to the possibility of a US carbon tax. At a technical level, there is considerable unanimity across the spectrum on the role of carbon taxation. In fact, a carbon tax would be a straightforward application of basic tax principles – building a carbon charge into existing (easily administered) excise duties for motor fuels and applying similar charges to other refinery products, coal, and natural gas.

Given strong likelihood that carbon pricing will be needed in the United States at some point, this volume collects policy notes (presented at a November 2012 conference) discussing likely implementation issues that will arise, should that time come.

The contributions, written by leading experts in the field, discuss many issues such as the impact of a carbon tax on the budget, emissions, the overall economy, low-income households, trade-exposed firms, and so on, and whether accompanying measures are needed to address the sensitivities. Opportunities for simultaneous reform of broader fiscal, energy, environmental, and technology policies, and how domestic carbon taxes compare with other countries’ mitigation efforts, are also covered.

While the views expressed here should not be attributed to our institutions, we nonetheless hope policymakers take away the message that a carbon tax (with judicious use of revenues) is not only a sound, and pressing, policy from a fiscal and environmental perspective, but also that the practical challenges (while not to understate them) are manageable.

Sanjeev Gupta Acting Director Fiscal Affairs Department International Monetary Fund

Ted Gayer Vice President and Director Economic Studies Program Brookings Institution

Molly Macauley Vice President Resources for the Future

Contributors

Joseph E. Aldy is an Assistant Professor of Public Policy at the Harvard Kennedy School, a Visiting Fellow at Resources for the Future, and a Faculty Research Fellow at the National Bureau of Economic Research. His research focuses on climate change policy, energy policy, and mortality risk valuation. He also serves as the Faculty Chair of the Mossavar-Rahmani Center for Business and Government Regulatory Policy Program. In 2009–2010, he served as the Special Assistant to the President for Energy and Environment at the White House. Aldy previously served as a Fellow at Resources for the Future (2005–2008), worked on the staff to the President’s Council of Economic Advisers (1997–2000), and served as the Co-Director of the Harvard Project on International Climate Agreements and Co-Director of the International Energy Workshop.

Samuel Brown is a former research associate at the Brookings Institution. He has a Master’s in Public Administration from the Maxwell School of Syracuse University and is an alumnus of Willamette University in Salem, Oregon.

Dallas Burtraw is one of the nation’s foremost experts on environmental regulation in the electricity sector. For two decades, he has worked on creating a more efficient and politically rational method for controlling air pollution. He also studies electricity restructuring, competition, and economic deregulation. He is particularly interested in incentive-based approaches for environmental regulation, the most notable of which is a tradable permit system, and recently has studied ways to introduce greater cost-effectiveness into regulation under the Clean Air Act. Burtraw’s current areas of research include analysis of the distributional and regional consequences of various approaches to national climate policy. He also has conducted analysis and provided technical support in the design of carbon dioxide emissions trading programs in the Northeast states, California, and the European Union. Burtraw and his colleagues recently completed a major project on estimating benefits of the value of natural resources in the Adirondack Park through surveying area residents on their willingness to pay for improvements. Also with colleagues, he studied the cost-effectiveness of various policies for promoting renewable energy.

Jack Calder. As a consultant working for the IMF and other organizations Jack Calder has advised governments in a wide range of developing countries on the administration of their natural resource revenues. He previously had a long career in the UK Inland Revenue, in the course of which he occupied various senior positions, including latterly that of Deputy Director of the Oil Taxation Office.

Leon C. Clarke is a Senior Research Economist at the Pacific Northwest National Laboratory (PNNL), and he is a staff member of the Joint Global Change Research Institute (JGCRI), a collaboration between PNNL and the University of Maryland at College Park. Dr. Clarke’s current research focuses on the role of technology in addressing climate change, scenario analysis, and integrated assessment model development. Dr. Clarke coordinated the U.S. Climate Change Science Program’s emissions scenario development process, and he was a contributing author on the Working Group III contribution to the IPCC’s Fourth Assessment Report. Prior to joining PNNL, Dr. Clarke worked for RCG/Hagler, Bailly, Inc. (1990–1992), Pacific Gas & Electric Company (1992–1996), and Lawrence Livermore National Laboratory (2002–2003). He was also a research assistant at Stanford’s Energy Modeling Forum (1999–2002), where he worked on issues related to technological change and integrated assessment modeling. Dr. Clarke received B.S. and M.S. degrees in Mechanical Engineering from University of California, Berkeley, and M.S. and Ph.D. degrees in Engineering Economic Systems and Operations Research at Stanford University.

Terry Dinan is a senior advisor at the Congressional Budget Office. She has written about a variety of environmental and energy issues, including the design of climate-change policies and their implications for households and businesses in the United States, the costs and consequences of higher fuel-economy standards, and the costs and effects of policies aimed at subsidizing energy sources and technologies. She has testified before Congress on those topics, published in a variety of professional journals, served as an associate editor for the Journal of Environmental Economics and Management, and served on the board of the Association of Environmental and Resource Economists. She has a Ph.D. in economics from Iowa State University. Before joining CBO, she worked at the Environmental Protection Agency and at Oak Ridge National Laboratory.

Allen A. Fawcett is the Chief of Climate Economics Branch of the U.S. Environmental Protection Agency. He led the Agency’s economic analyses of the leading climate change legislative proposals in the U.S. Congress. He has been extensively involved with the Stanford Energy Modeling Forum (EMF), and recently co-edited the Energy Journal Special Issue on the EMF-24 exercise, which explored the market-based and regulatory approaches to U.S. GHG reductions under different technology futures.

Carolyn Fischer works primarily on policy mechanisms and modeling tools that cut across environmental issues, from allowance allocation in emissions trading schemes to wildlife management in Zimbabwe. In the areas of climate change and energy policy, she has published articles on designing cap-and-trade programs, fuel economy standards, renewable portfolio standards, energy efficiency programs, technology policies, the Clean Development Mechanism, and the evaluation of international climate policy commitments. A current focus of her research is the interplay between international trade and climate policy, options for avoiding carbon leakage, and the implications for energy-intensive, trade-exposed sectors. In areas of natural resources management, her research addresses issues of wildlife conservation, invasive species, and biotechnology, with particular emphasis on the opportunities and challenges posed by international trade.

William G. Gale is the Arjay and Frances Miller Chair in Federal Economic Policy in the Economic Studies Program at the Brookings Institution. His research focuses on tax policy, fiscal policy, pensions, and saving behavior. He is Co-Director of the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute. He is also Director of the Retirement Security Project. From 2006 to 2009, he served as Vice President of Brookings and Director of the Economic Studies Program. Prior to joining Brookings in 1992, he was an Assistant Professor in the Department of Economics at the University of California, Los Angeles, and a Senior Economist for the Council of Economic Advisers under President George H. W. Bush.

Donald B. Marron is Director of Economic Policy Initiatives and Institute Fellow at the Urban Institute, Washington, DC. His work focuses on American economic and fiscal policy. Marron previously directed the Urban-Brookings Tax Policy Center, served as a Member of the President’s Council of Economic Advisers, and served as Acting Director of the Congressional Budget Office. He has also taught at the University of Chicago Graduate School of Business and the Georgetown Public Policy Institute. Marron is the editor of 30-Second Economics, a short introduction to 50 of the most important theories in economics.

Aparna Mathur is a Resident Scholar in Economic Policy Studies at the American Enterprise Institute in Washington, DC. She received her Ph.D. in Economics from the University of Maryland, College Park, in 2005. At AEI, her research has focused on income inequality and mobility, tax policy, labor markets, and small businesses. She has published in highly esteemed scholarly journals, testified several times before Congress, and published numerous articles in the popular press on issues of policy relevance. Her work has been cited in academic journals as well as in leading news magazines such as the Economist, the Wall Street Journal, Financial Times, and Business Week. Government organizations such as the Congressional Research Service and the Congressional Budget Office have also cited her work in their reports to Congress. She has been an Adjunct Professor at Georgetown University’s School of Public Policy, and has taught economics at the University of Maryland.

Richard Morgenstern’s research focuses on the economic analysis of environmental issues with an emphasis on the costs, benefits, evaluation, and design of environmental policies, especially economic incentive measures. His analysis also focuses on climate change, including the design of cost-effective policies to reduce emissions in the United States and abroad. Immediately prior to joining Resources for the Future, Morgenstern was Senior Economic Counselor to the Undersecretary for Global Affairs at the U.S. Department of State, where he participated in negotiations for the Kyoto Protocol. Previously he served at the U.S. Environmental Protection Agency, where he acted as Deputy Administrator (1993); Assistant Administrator for Policy, Planning, and Evaluation (1991–93); and Director of the Office of Policy Analysis (1983–95). Formerly a tenured professor at the City University of New York, Morgenstern has taught recently at Oberlin College, the Wharton School of the University of Pennsylvania, Yeshiva University, and American University. He has served on expert committees of the National Academy of Sciences and as a consultant to various organizations.

Adele Morris is a Fellow and Policy Director for Climate and Energy Economics at the Brookings Institution. Her expertise and interests include the economics of policies related to climate change, energy, natural resources, and public finance. She joined Brookings in July 2008 from the Joint Economic Committee (JEC) of the U.S. Congress, where she spent a year as a Senior Economist covering energy and climate issues. Before the JEC, Adele served nine years with the U.S. Treasury Department as its chief natural resource economist, working on climate, energy, agriculture, and radio spectrum issues. On assignment to the U.S. Department of State in 2000, she was the lead U.S. negotiator on land use and forestry issues in the international climate change treaty process. Prior to joining the Treasury, she served as the Senior Economist for Environmental Affairs at the President’s Council of Economic Advisers during the development of the Kyoto Protocol. She began her career at the Office of Management and Budget, where she conducted regulatory oversight of agriculture and natural resource agencies. She holds a Ph.D. in Economics from Princeton University, an M.S. in Mathematics from the University of Utah, and a B.A. from Rice University.

Richard G. Newell is the Gendell Professor of Energy and Environmental Economics at the Nicholas School of the Environment, Duke University, and Director of the Duke University Energy Initiative. In 2009 he was confirmed by the Senate as the head of the U.S. Energy Information Administration, the agency responsible for official U.S. government energy statistics and analysis, where he served until 2011. Dr. Newell has also served as the Senior Economist for Energy and Environment on the President’s Council of Economic Advisers. He is on the Board of Directors and is a University Fellow of Resources for the Future, where he was previously a Senior Fellow. He is a Research Associate of the National Bureau of Economic Research and has provided expert advice and consulted with many private, governmental, non-governmental, and international institutions.

Karen L. Palmer has been a researcher at Resources for the Future for more than 20 years and is the first recipient of the Darius Gaskins Chair. She specializes in the economics of environmental and public utility regulation, particularly on issues at the intersection of air quality regulation and the electricity sector. Her work seeks to improve the design of incentive-based environmental regulations that influence the electric utility sector, including controls of multi-pollutants and carbon emissions from electrical generating plants. To this end, she identifies cost-effective approaches to allocating emissions allowances, explores policies targeting carbon emissions and other air pollutants, and efficient ways to promote use of renewable sources of electricity.

Ian Parry is Principal Environmental Fiscal Policy Expert in the IMF’s Fiscal Affairs Department. He received a Ph.D. in economics from the University of Chicago and prior to joining the IMF in 2010 he worked for 15 years at Resources for the Future. Parry has written numerous articles on environmental, energy, and transportation policies in different countries, emphasizing the critical role of fiscal instruments for mitigating externalities. Recent (co-edited or co-authored) books include Fiscal Policy to Mitigate Climate Change: A Guide for Policymakers (IMF 2012), Getting Energy Prices Right: From Principle to Practice (IMF 2014), Issues of the Day: 100 Commentaries on Environmental, Energy, Transportation, and Public Health Policy (Resources for the Future 2010), and Toward a New National Energy Policy: Assessing the Options (Resources for the Future 2010).

William A. Pizer is Professor at the Sanford School and Faculty Fellow at the Nicholas Institute, both at Duke University. His current research examines how public policies to promote clean energy can effectively leverage private sector investments, how environmental regulation and climate policy can affect production costs and competitiveness, and how the design of market-based environmental policies can address the needs of different stakeholders. From 2008 until 2011, he was Deputy Assistant Secretary for Environment and Energy at the U.S. Department of the Treasury, overseeing Treasury’s role in the domestic and international environment and energy agenda of the United States. Prior to that, he was a researcher at Resources for the Future for more than a decade. He has written more than 30 peer-reviewed publications, books, and articles, and holds a Ph.D. and M.A. in Economics from Harvard University and B.S. in Physics from the University of North Carolina at Chapel Hill.

Nathan Richardson is an attorney and has been a researcher at Resources for the Future since 2009, specializing in environmental law and economics. His research has examined environmental liability, environmental federalism, and the relationship between law, regulatory institutions, and policy design. He has published research on law and policy related to climate change, including EPA regulation of greenhouse gas emissions under the Clean Air Act. Other research areas include regulation and liability rules related to oil and gas development. Richardson is also managing editor of RFF’s environmental policy and economics blog, Common Resources.

Fernando Saltiel is a Ph.D. student in Economics at the University of Maryland, College Park, and a former research assistant at the Brookings Institution. He has a Master’s in Public Policy and an undergraduate degree in Economics from the University of Maryland. His research focuses on public finance and environmental policy in developing countries.

Kenneth A. Small, Professor Emeritus of Economics at University of California, Irvine, specializes in transportation, urban, and environmental economics. He is especially known for research on urban highway congestion, value of time and reliability, and effects of energy policies for automobiles. He is on the editorial boards of four professional journals, and previously served as Associate Editor of Transportation Research Part B–Methodological and as co-editor of Urban Studies. He is a Fellow of Regional Science Association International. At Irvine, he previously served as Chair of Economics and Associate Dean of Social Sciences. Recent research writings include articles on the gasoline tax, transit pricing, fuel efficiency standards, and a book, The Economics of Urban Transportation, with Erik Verhoef (Routledge 2007).

Eric Toder is an Institute Fellow at the Urban Institute and Co-Director of the Urban-Brookings Tax Policy Center. Dr. Toder has authored numerous articles on tax policy, tax administration, and retirement policy. Prior to joining the Urban Institute, he held a number of positions in tax policy offices in the U.S. government and overseas, including service as Deputy Assistant Secretary for Tax Analysis at the U.S. Treasury Department, Director of Research at the Internal Revenue Service, Deputy Assistant Director for Tax Analysis at the Congressional Budget Office, and consultant to the New Zealand Treasury. He received his Ph.D. in Economics from the University of Rochester in 1971.

John P. Weyant is Professor of Management Science and Engineering, Director of the Energy Modeling Forum (EMF), and Deputy Director of the Precourt Institute for Energy Efficiency at Stanford University. He is also a Senior Fellow of the Precourt Institute for Energy and the Freeman-Spolgi Institute for International Studies at Stanford. Prof. Weyant earned a B.S./M.S. in Aeronautical Engineering and Astronautics, M.S. degrees in Engineering Management and in Operations Research and Statistics, all from Rensselaer Polytechnic Institute, and a Ph.D. in Management Science with minors in Economics, Operations Research, and Organization Theory from University of California, Berkeley. He also was also a National Science Foundation Post-Doctoral Fellow at Harvard’s Kennedy School of Government. His current research focuses on analysis of global climate change policy options, energy efficiency analysis, energy technology assessment, and models for strategic planning. He currently serves as co-editor of the journal Energy Economics.

Casey J. Wichman is a doctoral candidate in Agricultural and Resource Economics at the University of Maryland. His research interests lie at the intersection of environmental and public economics with an emphasis on examining the ways in which individuals make decisions in response to environmental policies. In particular, his work analyzes the effects of price as an instrument of conservation when price information is unclear, the welfare impacts of environmental regulation, and the role of information in the design of regulatory mechanisms. Some of his other research interests include the economic and environmental effects of public transportation, the role of water scarcity in the energy sector, and evaluating the validity of program evaluation techniques.

Roberton C. Williams III studies both environmental policy and tax policy, with a particular focus on interactions between the two. In addition to his role at Resources for the Future, he is a Professor at the University of Maryland, College Park, and a Research Associate of the National Bureau of Economic Research. He also serves as a co-editor of the Journal of Public Economics, editorial council member (and former co-editor) of the Journal of Environmental Economics and Management and member of the editorial board of the B. E. Journal of Analysis & Policy. He was previously an Associate Professor at the University of Texas, Austin, a Visiting Research Scholar at the Stanford Institute for Economic Policy Research, and an Andrew W. Mellon Fellow at the Brookings Institution.

Summary for Policymakers

Ian Parry

In the absence of mitigating measures, rising atmospheric concentrations of carbon dioxide (CO₂) and other greenhouse gases (GHGs) are projected to warm the planet by around 3.0 to 4.0°C by 2100 relative to pre-industrial times (IPCC 2013). Temperature increases of this magnitude (and substantially higher temperature increases cannot be ruled out) are very large by historical standards and pose considerable, and poorly understood, risks.

At the same time, the United States faces substantial fiscal challenges. In the absence of fiscal consolidation (beyond the sequester) the federal debt-to-GDP ratio – already (at 73 percent) well above historical levels – is projected (after a slight decline) to rise over the medium to longer term because of higher interest costs and growing spending for Social Security and the government’s major health care programs.¹ As indicated in Figure I.1, general government net debt (which includes the debt of sub-national governments) as a percent of GDP was higher in the United States than in the Euro area, advanced economies as a whole, and other country groupings (though some individual countries, like Japan, have much higher net debt levels).

A carbon tax – that is, a tax on the carbon content of fossil fuels (or on their carbon emissions) – could help to address both of these problems. Carbon taxes are potentially the most effective and cost-effective policies for reducing CO₂ emissions, which are otherwise set to gradually rise (see Figure I.2) despite high oil prices, shifting from coal to natural gas, and regulatory initiatives (e.g., on vehicle fuel economy), though emissions are not projected to reach their previous peak level in 2006. These taxes could also raise substantial revenues for easing fiscal pressures and/or funding reductions in other taxes that discourage and distort economic activity.

The possibility of a US carbon tax has received scrutiny recently, given the enticing possibility of including it in a more comprehensive tax reform effort, and the failure of attempts, culminating in 2009, to introduce a federal emissions trading system (ETS). In principle, the choice between an ETS and a carbon tax is less important than implementing one of them, but getting the design basics right (see below). Prior ETS proposals departed from some of these principles, however, most important, only a tiny portion of the emissions allowances were to be auctioned, which precluded most of the fiscal dividend, implying a much greater overall burden on the economy.

At the time this book was produced, the prospects for imminent adoption in the United States of a carbon tax – or anything like it – are remote. But politics can change. The economics of the case for carbon pricing, however, will not: there is near-universal agreement among economists that it will be essential if US emissions are ultimately to be rolled back at reasonable cost. So building consensus over appropriate policy design will be critical. In fact, a number of other countries are grappling with similar design issues in preparation for launching carbon pricing schemes in 2015 or thereabouts.² Having a sense of a well-designed carbon tax also provides a critical benchmark against which other (interim) mitigation measures, and other deficit control options, can be compared in terms of environmental, fiscal, economic, distributional, and other impacts, to illuminate tradeoffs and promote more informed dialogue about policy options.

The purpose of this volume is therefore to clarify the rationale for a US carbon tax and provide practical guidance on sound carbon tax design, accounting for the broader fiscal context and political sensitivities (e.g., impacts on vulnerable firms and households).³

At a basic level, carbon tax design is largely common sense. Insofar as possible:

The tax should be comprehensive to promote all options for reducing (energy-related) CO₂ emissions. This can be achieved, for example, by levying charges on all fuel supplies in proportion to carbon content.
The fiscal dividend should be exploited by using revenues for deficit reduction, cutting other highly distorting taxes, or other economically productive purposes.
The carbon price should be credible, stable, and rising over time to provide clear signals for clean technology investment.
The price should strike a reasonable balance between economic and environmental concerns by setting it to reflect environmental damages (see Box I.1).

Scratching deeper, however, there are numerous, more subtle questions. These include the role of carbon taxes in broader deficit reduction packages; how much more effective and cost effective are carbon taxes relative to other mitigation options; how the tax might be administered; its impacts on emissions and the overall economy; how burdens on households and firms might be handled; the role of accompanying technology policy; opportunities for reforming policies currently affecting energy and transport systems; how mitigation efforts could be compared across countries; and many others.

This volume brings together 13 policy notes, written by leading fiscal and environmental experts, to shed light on these and other issues.⁴ The rest of this summary chapter briefly distills some lessons for policymakers from individual chapters (which are up to date as of 2012).

^{Box I.1}

Choosing a Price for Co₂ Emissions

There are two economic approaches to gauging the appropriate price on CO₂ emissions (e.g., Bosetti et al. 2012, Griffiths et al. 2012, Nordhaus 2013).

One is to assess least-cost emissions pricing trajectories (at an international level) that are broadly consistent with ultimate goals for global climate stabilization. These price projections are highly sensitive to future uncertainties (e.g., emissions growth without mitigation, fuel prices, costs of emissions-saving technologies). Nonetheless, near-term prices in the ballpark of $30 (in year 2012) per ton of CO₂ (rising annually at about the rate of interest) appear to be broadly consistent with keeping mean projected warming (over pre-industrial levels) to 2.5°C. A 2.0°C target may still be technically feasible, though it would likely require development and global deployment of technologies to remove CO₂ from the atmosphere (to help stabilize atmospheric GHG concentrations at current levels).

The second approach is to assess the ‘social cost of carbon’ (SCC), or the environmental damage per additional ton of CO₂ emissions. This is estimated using models capturing links between emissions and future atmospheric CO₂ concentrations, between those concentrations and climate variables, and between these variables and various damages (e.g., agricultural, sea level, health, and ecological impacts) with all damages discounted to the present. Again uncertainties abound, but a recent US government report (IAWG 2013) puts the SCC at about $40 per ton for 2015 (in year 2012), significantly higher than in an earlier report (IAWG 2010), with the price rising at about 2 to 3 percent a year in real terms. These estimates remain highly contentious, however, given their sensitivity to different assumptions for discount rates (especially important, given the intergenerational nature of climate impacts) and alternative ways of modeling extreme risks.

Tax theory suggests that carbon taxes should be largely set on environmental (rather than fiscal) grounds with remaining government revenue needs met through broader taxes (e.g., on consumption, labor income, or products with immobile bases).

Carbon taxes in a fiscal context (Chapter 1)

As revenue is one of the two key motivations for a carbon tax, an important question discussed by William Gale, Samuel Brown, and Fernando Saltiel is how a carbon tax compares with other fiscal options simply in terms of its revenue potential.

For perspective, the permanent tax increases and/or spending reductions needed to stabilize the federal debt-to-GDP ratio at its 2012 level (72.5 percent of GDP) through 2089 – let alone reduce this ratio to historical levels – amount to 3–5 percent of GDP. There are numerous possibilities, for example, two proposals discussed in Chapter 1 to limit itemized deductions and tax expenditures could each raise roughly 0.3 percent of GDP, and even a modest carbon tax of $15 per ton could raise 0.5 percent of GDP (net of its indirect impacts on lowering other revenue sources).

But unlike most other tax options, which – leaving aside the use to which the proceeds are put – only impose costs on the economy (such as the detrimental effects of taxes on income and saving for work effort and investment), a carbon tax also generates important environmental benefits. The tax corrects for a ‘market failure’ – emissions that would be too high if there were no charge for their environmental damages or that would otherwise need to be addressed through alternative (more costly and less efficient) measures.

Carbon taxes in an environmental context (Chapter 2)

The other key motivation for the carbon tax is environmental – as the tax is reflected in the prices for fossil fuels, electricity, and so on, it encourages the entire range of possibilities for reducing CO₂ emissions.

Other climate-related policies are (by themselves) far less effective because, as discussed by Ian Parry, they focus on a much narrower range of these opportunities. For example, incentives for renewable generation fuels (which do not reduce electricity demand, do not reduce emissions outside of the power sector, and do not promote shifting from coal to natural gas or from these fuels to nuclear) miss around 70 percent of the emissions reduction opportunities that would be exploited by carbon pricing. A package of complementary regulations can be more effective but would still miss some opportunities (if anything, fuel efficiency standards, for instance, encourage people to drive more rather than less), would require a lot of credit trading provisions to provide firms with flexibility on how to reduce emissions, and would not raise revenue.

A carbon tax can also achieve a given emission reduction at the lowest overall cost to the economy, and conceivably a negative cost: but this hinges critically on productive use of revenues – if revenues are used for low-valued spending or excessive compensation schemes, overall policy costs are considerably higher.

Tax administration (Chapter 3)

Imposing carbon taxes on fuel supply (based on carbon content) has significant administrative advantages over downstream charging systems (based on emissions). As Jack Calder discusses, the former involves monitoring only around 1,500 taxpayers, comprehensively covers emissions, and can build on well-established procedures for administering motor fuel and coal excise taxes. Pricing embodied carbon in imported products, or providing other protection for trade-exposed/energyintensive firms, significantly complicates administration, however (see below).

Taxing fossil fuel CO₂ emissions should take first priority, as they are by far the largest source of GHGs. If carbon capture and storage (CCS) at power plants and measurement of stored carbon in forests become practical, a simple system of government payments for sequestered carbon (to complement the carbon tax) would be administratively straightforward.

Achieving emissions targets (Chapter 4)

The emissions implications of alternative carbon tax scenarios are important, not least given the Administration’s pledge to reduce emissions by 17 percent below 2005 levels by 2020. According to Allen Fawcett, Leon Clarke and John Weyant recent modeling exercises suggest a CO₂ price of around $25 per ton (in year 2012) is broadly consistent with meeting this objective, accounting for recent regulatory initiatives (e.g., for vehicles and power plants). Most reductions come from reducing coal use, a smaller amount from reducing petroleum, with net impacts related to uses of natural gas unclear.

Various combinations of technologies (e.g., CCS, renewables, and energy-saving technologies) can greatly contain carbon mitigation costs though no individual technology is likely to be enough on its own, underscoring the need for advancing a diverse portfolio of technological possibilities. ‘Carbon budgets’ (specifying allowable cumulative emissions over an extended period and requiring carbon tax increases if emissions are not on track to stay within budget) can help to reconcile carbon taxes with internationally negotiated targets for emissions reductions.

Macroeconomic effects (Chapter 5)

Roberton Williams and Casey Wichman suggest that carbon taxes of the size considered here should not have large impacts on annual GDP growth rates – perhaps in the order of 0.03 percent (prior to revenue use). But even these effects can be largely offset if revenues are used to lower labor income taxes, and perhaps even more than offset (leaving an, albeit modest, net economic gain, even without counting environmental benefits) if revenues are used to lower corporate income taxes (which are often found to be the most costly in terms of distorting economic activity).

Evaluating alternative uses of carbon tax revenues for public spending is difficult (without more information on the extra spending and its value to society) though well-targeted investments (e.g., in research, education, and infrastructure) could have high payoffs. As for fiscal consolidation, by lessening the need for future tax increases this could yield even larger benefits over the longer term than cutting current taxes, though minimizing macroeconomic risks suggests fiscal tightening should be gradual.

Distributional effects (Chapter 6)

Understanding who bears the burden of a carbon tax is critical for evaluating its fairness and designing possible compensation schemes. As discussed by Adele Morris and Aparna Mathur, most of the burden (prior to revenue use) is borne by households in the form of higher prices for energy in particular and products in general. And low-income households are especially vulnerable due to their relatively high budget shares for energy. However, disparities among income groups are less pronounced when burdens are expressed relative to consumption rather than income (it is not clear whether income or consumption is the better measure of household well-being) and induced changes in income (e.g., from lower rates of return to capital) are considered.

Using carbon tax revenues to fund simple proportionate reductions in other federal taxes will (for the most part) disproportionately help higher income groups. However, numerous combinations of adjustments to rate schedules, tax brackets, and rebates might be used to make the policy more distribution neutral overall, though this might strengthen the case for including the tax as part of a more comprehensive (and badly needed) overhaul of the tax and social safety net system. The burden of a federal carbon tax would also vary regionally, but the policy implications from this are unclear (e.g., states that currently use a lot of coal tend to have relatively low prices for electricity, so the tax would tend to even out electricity prices across the country).

Targeted measures to help low-income households (Chapter 7)

Even if a carbon tax is part of a fiscal package that is broadly distribution neutral, policymakers may still wish to provide some relief to low-income households for the burden of higher energy prices. The tension is that targeted measures (e.g., the – previously termed – food stamp program) inherently reduce the benefits from other possible uses of the additional revenue raised (e.g., the improved work and investment incentives from lowering income taxes).

However, as Terry Dinan shows, with well-designed measures the erosion of revenue gains is limited – households in the lowest income quintile, for example, could be fully compensated with about 12 percent of the carbon tax revenues, leaving 88 percent of the revenue for more economically efficient purposes. And where possible, compensation should involve schemes (such as payroll tax rebates) that both help low-income households and improve economic incentives. Additionally, compensation schemes would ideally build off existing administrative capabilities (e.g., for electronic benefit transfer systems) rather than adding a new layer of institutional structure.

Reforming corporate income taxes (Chapter 8)

Donald Marron and Eric Toder suggest that support for a carbon tax might be broadened by bundling it with corporate income tax reforms of the kind that many have urged for the United States. Lowering the statutory corporate tax rate, now among the highest in the world, and making permanent some (expiring) tax preferences with widespread political support (e.g., the R&D tax credit or small business reliefs), while eliminating others (e.g., support for traditional and alternative energy) potentially made redundant by a carbon tax, would help economic performance by attracting more investment to the United States and reduce incentives for corporations to shift reported income to overseas jurisdictions.

The concern here is that corporate income tax reductions disproportionately benefit the better off, underscoring the need for other measures (e.g., reduced tax preferences for the wealthy, targeted support for the poor) in a broader, distributionally balanced, package of fiscal reforms.

Addressing competitiveness impacts (Chapter 9)

Carolyn Fischer, Richard Morgenstern, and Nathan Richardson discuss the impacts of a carbon tax on the competitiveness of energy-intensive/trade-exposed industries (e.g., steel and aluminum producers), which has been an ongoing concern in efforts to price carbon. Loss of competitiveness can also cause ‘emissions leakage’ if firms relocate overseas or lose world markets to others not subject to the same carbon pricing. Fortunately these impacts are not especially large – industries with energy expenditures in excess of 5 percent of the value of their output account for less than 2 percent of US GDP – because dealing with them is not so easy (though efficient allocation of productive capacity implies that firms unable to compete when energy is properly priced should be allowed to go out of business over the longer term).

One possibility is to exempt these firms from carbon pricing, but this forgoes some low-cost mitigation opportunities, and reduces revenue (by around 10–15 percent). Broad reductions in corporate income taxes are not well suited either, as most of the benefits leak away to firms that are not in the energy-intensive/trade-exposed sector. More promising is to provide rebates related to output levels for vulnerable firms, as this preserves their incentives to lower energy intensity – but again this uses up revenue, and it might violate World Trade Organization (WTO) rules (which prohibit export subsidies). Border tax adjustments (particularly charges for the carbon content of imports whose production is energy intensive) can address competitiveness and leakage concerns but they are the most politically controversial option and face significant legal and administrative challenges. The best outcome would be for US trading partners to simultaneously price carbon, thereby weakening pressure for these types of measures.

Complementing carbon taxes with technology policy (Chapter 10)

The development and deployment of cleaner energy technologies over the longer term is critical for containing future mitigation costs and expanding emission reduction opportunities. Yet investment in these technologies is insufficient if firms are not fully rewarded for emissions reductions, and also if innovators are not appropriately rewarded for the benefits of technological advances to other firms (though the latter is a generic problem for all new innovations). A carbon tax therefore needs to be complemented with technology policies.

Richard Newell recommends ramping up, by about $3 billion annually, federal support for basic research into critical, climate-related needs (based on plausible assumptions about opportunities like solar energy and energy storage and rates of return to research). Making the R&D tax credit permanent across all sectors (to bolster incentives from intellectual property rights) would cost a further $10 billion a year (a modest fraction of potential carbon tax revenues). Additional incentives for demonstration projects, and for the deployment of new technologies, may also have a role, but they need to be carefully evaluated on a case-by-case basis.

Opportunities for reforming power sector policies (Chapter 11)

Carbon taxes set at an appropriate level would reduce, and in some cases eliminate, the need for other climate-related policies at federal and state level affecting the power sector, including support for renewables (currently about $5 billion a year from the federal government), energy efficiency requirements, and regulation of power plants.

As Dallas Burtraw and Karen Palmer suggest, however, it may in some cases make sense, at least initially, to preserve regulatory structures. For one thing, in practice the carbon tax may be set insufficiently high from an environmental perspective (though designating the Environmental Protection Agency to recommend tax levels based on scientific evidence may help). For another, various market barriers may justify a role for complementary measures, though the appropriate stringency of these measures needs to be carefully evaluated and cost containment safeguards should be built in. And a carbon tax should not necessarily preclude additional mitigation efforts at a sub-national level, though these need to be compatible with (rather than undermined by) the federal policy.

Opportunities for reforming transportation policies (Chapter 12)

Even if a carbon tax were introduced, according to Ian Parry and Kenneth Small, motor fuels in the United States would still be undercharged for the adverse side effects of vehicle use, which include highway congestion, accidents, and local pollution. Ideally, however, these other problems would be more effectively reduced through per-mile tolls, with fuel taxes retained only to reflect carbon damages and perhaps local pollution. Ideally these tolls would also vary, for example, across time of day and region to address congestion. Even with a carbon tax, other policies (e.g., air pollution regulations and transit fare subsidies) have a role, though the case for aggressive fuel economy standards is questionable given that they do not deter automobile use.

While earmarking can be problematic, revenues from carbon charges on motor fuels could go a long way toward covering current and growing shortfalls in highway funding, though they would not fully fund perceived infrastructure needs. But mileage taxes would be more stable as a source of highway funding than carbon charges on motor fuels, as they avoid the erosion of the tax base due to rising fuel economy and, by encouraging more efficient road use, they would also improve the productivity of highway investments.

Promoting international mitigation efforts (Chapter 13)

Ideally, carbon pricing in the United States would enhance momentum for similar pricing efforts elsewhere (not least, as already mentioned, to assuage concerns about competitiveness) and to facilitate this, metrics for comparing mitigation efforts across countries would be especially useful.

According to Joseph Aldy and William Pizer, no single metric is perfect, however. Comparing carbon prices alone does not account for other measures (e.g., energy efficiency mandates or tax reliefs for energy companies) that may reinforce or undermine mitigation incentives from the carbon price. Nor is comparing emission levels (relative to those in a baseline year) entirely satisfactory, as emissions depend on other factors (e.g., business-cycle-related shifts in energy demand), rather than just policy effort. Countries will therefore need to explore – perhaps based on analytical work – a suite of metrics for assessing whether they have undertaken appropriately comparable mitigation efforts.

Summing up, although there are many challenges to consider in crafting and implementing carbon tax legislation, they are largely manageable. What is important is not to lose sight of the basics – carbon tax design is not rocket science, but rather a straightforward extension of long-established, and easily administered, fuel excises. Any policy that deviates from common sense principles – whether that be excluding a significant portion of emissions, not exploiting the fiscal dividend, or failing to establish a credible and reasonably scaled price – will not realize its full potential for addressing environmental and fiscal challenges.

Notes

See www.cbo.gov/publication/44521.

See www.thepmr.org.

There are no previous books on a US carbon tax. Parry et al. (2012) provide guidelines on the design of fiscal policy to reduce greenhouse gases but for countries in general (without specifics for the US context), while Environmental Tax Policy Institute (2009) reviews carbon taxes in different parts of the world. A number of journal articles have been written on carbon tax design, but without getting into the detail considered in this volume (e.g., Aldy et al. 2008, Metcalf 2009, Metcalf and Weisbach 2009).

The papers were presented at a November 2012 conference hosted by the American Enterprise Institute (AEI), Brookings, the IMF, and Resources for the Future. AEI’s publication rules preclude its inclusion as a co-publisher of this volume.

References

Aldy, Joseph, Eduardo Ley, and Ian Parry, 2008. “A Tax-Based Approach to Slowing Global Climate Change.” National Tax Journal LXI, 493–518.
- Search Google Scholar
- Export Citation
Bosetti, Valentina, Sergey Paltsev, John Reilly, and Carlo Carraro, 2012. “Emissions Pricing to Stabilize Global Climate”. In I. Parry, R. de Mooij, and M. Keen (eds.), Fiscal Policy to Mitigate Climate Change: A Guide for Policymakers. Washington, DC, International Monetary Fund.
- Search Google Scholar
- Export Citation
EIA, 2013a. US Carbon Dioxide Emissions, 1990–2009. Energy Information Administration, US Department of Energy, Washington, DC. Available at: www.eia.gov/environment/data.cfm#summary.
- Search Google Scholar
- Export Citation
EIA, 2013b. Annual Energy Outlook 2013 Early Release. Energy Information Administration, US Department of Energy, Washington, DC. Available at: www.eia.gov/oiaf/aeo/tablebrowser/.
- Search Google Scholar
- Export Citation
Environmental Tax Policy Institute, 2009. The Reality of Carbon Taxes in the 21st Century. Vermont Law School, South Royalton, VT. Available at: www.vermontlaw.edu/Documents/020309-carbonTaxPaper(0).pdf.
- Search Google Scholar
- Export Citation
Griffiths, Charles, Elizabeth Kopits, Alex Marten, Chris Moore, Steve Newbold, and Ann Wolverton, 2012. “The Social Cost of Carbon: Valuing Carbon Reductions in Policy Analysis.” In I. Parry, R. de Mooij, and M. Keen (eds.), Fiscal Policy to Mitigate Climate Change: A Guide for Policymakers. Washington, DC, International Monetary Fund.
- Search Google Scholar
- Export Citation
IMF, 2013. Fiscal Monitor: Taxing Times. International Monetary Fund, Washington, DC. Available at: www.imf.org/external/pubs/ft/fm/2013/02/fmindex.htm.
- Search Google Scholar
- Export Citation
IPCC, 2013. Climate Change 2013: The Physical Science Basis. Working Group I Contribution to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. Available at: www.ipcc.ch/report/ar5/wg1/.
- Search Google Scholar
- Export Citation
Metcalf, Gilbert E., 2009. “Designing a Carbon Tax to Reduce US Greenhouse Gas Emissions.” Review of Environmental Economics and Policy 3, 63–74.
- Search Google Scholar
- Export Citation
Metcalf, Gilbert E. and David Weisbach, 2009. “The Design of a Carbon Tax.” Harvard Environmental Law Review 3, 499–556.
- Search Google Scholar
- Export Citation
Nordhaus, William D., 2013. The Climate Casino: Risks, Uncertainty, and Economics for a Warming World. New Haven, CT, Yale University Press.
- Search Google Scholar
- Export Citation
Parry, Ian W. H., Ruud A. de Mooij, and Michael Keen (eds.), 2012. Fiscal Policy to Mitigate Climate Change: A Guide for Policymakers. Washington, DC, International Monetary Fund.
- Search Google Scholar
- Export Citation
US IAWG, 2013. Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis under Executive Order 12866. Interagency Working Group on Social Cost of Carbon, United States Government, Washington, DC. Available at: www.whitehouse.gov/sites/default/files/omb/inforeg/social_cost_of_carbon_for_ria_2013_update.pdf.
- Search Google Scholar
- Export Citation
US IAWG, 2010. Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis under Executive Order 12866. Interagency Working Group on Social Cost of Carbon, United States Government, Washington, DC. Available at: www.epa.gov/oms/climate/regulations/scc-tsd.pdf.
- Search Google Scholar
- Export Citation

Glossary of Technical Terms and Abbreviations

American Clean Energy Security (ACES) Act.	A 2010 bill (introduced by Congressmen Waxman and Markey) with an ETS as its centerpiece. The bill passed the House, but the Senate version (Kerry-Lieberman’s American Power Act) was never put to the vote.
Applied research.	Research to gain knowledge or understanding to meet a specific, recognized need (e.g., with respect to commercial objectives for products or technologies).
Basic research.	Research to gain improved knowledge or understanding of the subject under study without specific applications in mind (though it can be directed to areas or technologies of potential interest). Universities, other non-profits, and federal labs perform about 80 percent of basic research, more than half of which is funded by the federal government.
Biomass.	Biological material derived from living, or recently living, organisms, particularly plants or plant-derived materials. As a renewable energy source, biomass can be combusted directly to produce heat, or used or indirectly after converting it to various forms of biofuel (e.g., ethanol).
Border tax adjustments (BTAs) or border carbon adjustments (BCAs).	These measures impose charges on the embodied carbon content of certain products imported in the United States and (in some proposals) provide relief for domestic carbon taxes that might be reflected in production costs for categories of exports.
Bunker fuels.	Fuel oil used to power ships.
Burden or incidence.	Refers to whose economic welfare is reduced by this tax, and by how much. It is quite different from the formal or legal incidence – fuel suppliers, for example, may be responsible for remitting tax payments to the Internal Revenue Service, but they may bear little economic incidence if they can charge higher prices.
Business as usual (BAU).	Economic outcomes that would occur in the absence of a new policy or policy change.
Carbon budget.	Specifies a maximum allowable amount of CO₂ emissions that a country can emit over a period of time (e.g., 10 years).
Carbon capture and storage (CCS).	An (as yet unproven) technology for extracting CO₂ emissions from smokestacks and transporting them via pipelines to underground geological storage sites.
Carbon dioxide (CO₂).	The main GHG. To convert tons of CO₂ into tons of carbon, divide by 3.67. To convert a price per ton of CO₂ into a price per ton of carbon, multiply by 3.67.
Carbon sequestration.	The process by which carbon sinks remove CO₂ from the atmosphere.
Carbon sink.	A natural or artificial reservoir that accumulates and stores, indefinitely, a carbon-containing compound. Natural sinks include the oceans, forests, and plants. Artificial sinks include CCS technologies.
Carbon tax.	A tax imposed on CO₂ releases emitted largely through the combustion of carbon-based fossil fuels. Administratively, the easiest way to implement the tax is through taxing the fossil fuels – coal, oil, and natural gas – in proportion to their carbon content.
Clean Air Act (CAA).	A federal law that requires the EPA to develop and enforce regulations to protect the public from pollutants known to be hazardous to human health. EPA has been regulating GHGs since 2011, following a US Supreme Court decision in 2007 affirming EPA’s authority to do so under the CAA.
Clean energy standard (CES) and tradable performance standard.	Policies to lower the CO₂ intensity of the power generation (or other) sectors. The CES does this through requiring a shift toward clean, or relatively clean, fuels, while the performance standard provides similar incentives through maximum allowable emission rates. Proposals typically include trading provisions to contain compliance costs.
CO₂ equivalent.	The warming potential of a GHG over a long time period expressed in terms of the amount of CO₂ that would yield the same amount of warming.
Common but differentiated responsibilities (CBDR).	A principle of the UNFCCC calling for developed countries to bear a disproportionately larger burden of mitigation costs (e.g., by funding emissions reduction projects in developing countries), given that they are relatively wealthy and contributed most to historical atmospheric GHG accumulations.
Corporate Average Fuel Economy (CAFE) standards.	These impose requirements on the average fuel economy of new passenger vehicle sales. By 2016, the standards will average 35.5 miles per gallon and 54.5 miles per gallon by 2025, if applied to the current fleet mix with full compliance. Actual fuel economy may fall short of these levels, for example, if manufactures opt to pay out-of-compliance fines due to insufficient technological opportunities.
Corporate tax integration.	Integration of the individual and corporate income tax systems such that corporate income would be taxed only once.
Corrective tax.	A charge levied on a source of environmental harm and set at a level to reflect, or correct, for environmental damages.
Credit trading.	In ETSs, credit trading allows firms with high pollution abatement costs to do less mitigation by purchasing allowances from relatively clean firms with low abatement costs. Similarly, in regulatory systems credit trading allows firms with high compliance costs to fall short of an emissions (or other) standard by purchasing credits from other firms that exceed the standard.
Cyclical unemployment.	Unemployment caused by downturns in the business cycle.
Demonstration.	Seeks to prove the viability of new technologies (from R&D) at commercial scale (prior to deployment).
Discount rate.	In the present context, this refers to the rate at which damages in the future from climate change caused by current emissions are discounted back to the present.
Distribution-neutral policy.	A policy that imposes the same burden as a proportion of income (or some other measure of household well-being) on all different income groups.
Double dividend.	Refers to the idea that imposing an environmental tax and using the revenues, for example, to cut other taxes could produce two dividends: first, a reduction in pollution emissions and second, a boost in GDP and/or economic efficiency.
Downstream carbon tax.	Refers to a tax imposed at the point where CO₂ emissions are released from stationary sources (primarily at coal plants and other industrial facilities). It could be levied on metered emissions out of the smokestack or on embodied carbon in fuel inputs.
Earned Income Tax Credit (EITC).	A refundable tax credit available to low-income wage earners.
Economic welfare.	A notion of household well-being encompassing everything that individuals value – market goods and services measured by GDP plus nonmarket items (e.g., childcare at home, leisure time).
Emissions leakage.	Refers to a possible increase in emissions in other regions in response to an emissions reduction in one country or region. Leakage could result from the relocation of economic activity, for example, the migration of energy-intensive firms away from countries whose energy prices are increased by climate policy. Alternatively, it could result from price changes, for example, or increased demand for fossil fuels in other countries as world fuel prices fall in response to reduced fuel demand in countries taking mitigation actions.
Emissions trading system or scheme (ETS).	A market-based policy to reduce emissions (sometimes referred to as cap-and-trade). Covered sources are required to hold allowances for each ton of their emissions or (in an upstream program) embodied emissions content in fuels. The total quantity of allowances is fixed and market trading of allowances establishes a market price for emissions. Auctioning the allowances provides a valuable source of government revenue.
Energy-efficiency gap or energy paradox.	The observation that consumers fail to adopt energy-efficient technologies that appear to more than pay for their upfront investment costs in terms of the expected savings in energy costs over the life of the technology.
Energy-intensive and trade-exposed (EITE) firms.	Firms (e.g., cement, aluminum, and chemicals producers) exposed to international trade whose production costs would increase significantly in response to higher energy prices.
Energy Modeling Forum (EMF).	Based at Stanford University, the EMF provides a forum for discussing modeling results related to energy and environmental policy.
Enteric fermentation.	A digestive process of ruminant animals, such as cows and sheep, by which microorganisms break down carbohydrates into simple molecules for absorption into the bloodstream. It accounts for about 20 percent of US methane emissions.
Environmental Protection Agency (EPA).	The federal agency responsible for regulating GHGs (and other emissions) at a national level under provisions of the Clean Air Act.
Environmental (or green) tax shift.	Increasing environmental taxes and lowering other taxes (e.g., on labor or capital income) in a way that has no effect on total tax revenues.
Exajoule (EJ).	Unit of energy equal to one quintillion (10¹⁸) joules.
Extenders.	Various business tax breaks that have recently been extended through the end of 2013.
Externality.	A cost imposed by the actions of individuals or firms on other individuals or firms (possibly in the future, as in the case of climate change) that the former do not take into account.
Feebate.	This policy would impose a fee on firms with emission rates (e.g., CO₂ per kWh) above a ‘pivot point’ level and provide a corresponding subsidy for firms with emission rates below the pivot point. Alternatively, the feebate might be applied to energy consumption rates (e.g., gasoline per km) rather than emission rates. Feebates are the pricing analog of an emissions (or energy) standard, but they circumvent the need for credit trading (across firms and across time periods) to contain policy costs.
Fiscal consolidation.	A reduction in the underlying fiscal deficit through tax increases and/or spending reductions.
Fiscal cushioning.	In the present context, this refers to adjustments to broader energy taxes or subsidies that offset some of the environmental effectiveness of a formal carbon tax. It would be potentially important to monitor (and perhaps penalize) fiscal cushioning in an international carbon tax agreement.
Fiscal gap.	The immediate and permanent increase in taxes and/or reduction in spending that would be needed to keep the long-term debt-to-GDP ratio at its current level.
Global warming potential (GWP).	A measure of how much heat a ton of a non-CO₂ GHG traps in the atmosphere over a given period of time relative to the amount of heat trapped per ton of CO₂.
Great Recession.	An ongoing global economic decline that began in December 2007 and took a particularly sharp downward turn in September 2008.
Greenhouse gas (GHG).	A gas in the atmosphere that is transparent to incoming solar radiation but traps and absorbs heat radiated from the earth. CO₂ is easily the most predominant GHG.
Highway Trust Fund.	A transportation fund financed from federal motor fuel taxes (and other vehicle excises) to pay for highway and transit projects.
Hybrid electric vehicle (HEV).	A vehicle combining a conventional internal combustion engine propulsion system with an electric propulsion system.
Hydrofluorocarbons (HFCs).	A source of GHGs, with especially high GWPs, used in refrigeration and air conditioning.
Inducement prizes.	These can provide financial rewards for specific (high-priority) technological advances.
Input/output table.	This provides detailed information on the value of output and value of various categories of input (including fuels and electricity use) by industries producing both intermediate goods and final consumer goods. These tables can be used to trace through the effects of carbon taxes (via higher energy prices) on the price of final goods (assuming all of the carbon tax is ultimately reflected in higher consumer prices).
Inter-agency working group on the SCC.	A group of representatives from US executive branch agencies and offices tasked with developing consistent estimates of the SCC for use in regulatory analysis.
Intergovernmental Panel on Climate Change (IPCC).	The IPCC assesses the scientific, technical, and socio-economic information relevant for understanding climate change. Its Fifth Assessment Report (AR5) is available at: www.ipcc.ch/index.htm.
Joint Committee on Taxation (JCT).	Committee of the US Congress established under the Internal Revenue Code consisting of members from the Senate Finance Committee and the House Ways and Means Committee. The Committee monitors, reviews, and makes recommendations to improve the operation and administration of domestic federal taxes.
Kyoto gases.	This refers to the six gases for which emission reduction pledges were made under the Kyoto Protocol. They include carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), sulphur hexafluoride (SF₆), and two groups of gases hydrofluorocarbons (HFCs), and perfluorocarbons (PFCs).
Kyoto Protocol.	Under this Protocol, 37 ‘Annex 1’ or developed countries committed themselves to reducing CO₂ and five other GHGs to about 5 percent below 1990 levels by 2012 (China was not part of the Protocol and the United States never ratified it). The second Kyoto commitment period (2013 to 2020) replicates previously negotiated emissions targets for a subset of developed countries and a range of mitigation actions from a broader range of countries.
Low-Income Home Energy Assistance Program (LIHEAP).	This program helps low-income families pay their energy costs for space heating and cooling.
Marginal effective tax rate (METR).	The percentage reduction in the after-tax rate of return on a new investment due to corporate income taxes.
Market failure.	A situation where the private sector by itself would not make production and consumption decisions that would be efficient from society’s perspective, for example, excessive generation of GHG emissions due to the failure to price them for environmental damages.
National Energy Modeling System (NEMS).	A modeling system used by the Energy Information Administration to project energy-related variables (as reported, for example, in the Annual Energy Outlook) and conduct policy simulations. NEMS contains considerable, up-to-date detail on a wide range of existing and emerging technologies across the energy system (e.g., fuel-saving technologies that might be incorporated into different vehicle classes), while also balancing supply and demand in all – energy and other, regional and national – markets of the economy.
Negative emissions technology.	A technology that on net reduces atmospheric concentrations of GHGs (e.g., co-firing biomass in power plants that have installed CCS technologies).
Non-CO₂ GHGs.	These gases account for about 16 percent of total US GHGs. These gases, which include methane, nitrous oxide, and HFCs, have relatively high GWPs.
Output-based rebate (OBR).	In the context of a carbon tax, this is a payment per unit of output to compensate firms whose production costs rise significantly in response to higher energy prices.
Passed backwards.	The extent to which a (carbon) tax lowers prices for energy suppliers.
Passed forward.	The extent to which a (carbon) tax raises prices for energy consumers.
Per mile tolls.	Charges levied in proportion to distance driven by a vehicle where the rate might vary, for example, with the amount of congestion on the road (charges might be metered electronically through Global Positioning Systems).
Plug-in hybrid electric vehicle (PHEV).	A hybrid vehicle which utilizes rechargeable batteries, or similar energy storage device, that can be restored to full charge by connecting a plug to an external electric power source.
Polluter pays principle.	The idea that those responsible for producing pollution should be charged the damages done to other parties.
Progressive policy.	A policy that imposes a larger burden as a proportion of income (or some other measure of household well-being) on higher income groups and a smaller burden on lower income groups.
Public good.	A good whose use by one person or firm does not reduce the availability of it for others and whose use by others is not easily prevented. Knowledge from research is a classic example.
R&D or RD&D.	The former refers to research and development and the latter to R&D plus demonstration.
R&D tax credit.	These credits allow businesses to apply for a dollar-for-dollar reduction of tax liability for qualified expenditures on research activities conducted in the United States. The tax credit is expired in December 2013 but is expected to be renewed for 2014.
Refundable tax credit.	When a tax credit exceeds an individual’s or business’s tax liability and the difference is paid back to the individual or business.
Regressive policy.	A policy that imposes a larger burden as a proportion of income (or some other measure of household well-being) on lower income groups and a smaller burden on higher income groups.
Renewable portfolio standard (RPS).	A regulation requiring utilities to use renewable sources to generate a specific minimum amount of the power they produce and sell, where generators (with relatively emissions intensive portfolios) usually have the flexibility to fall short of the standard by purchasing credits from other (relatively clean generators) that exceed the standard. Renewable portfolio standards have been introduced in 29 US states and there have been several proposals to introduce them at the federal level.
Revenue-recycling.	Use of (carbon) tax revenues to, for example, lower other taxes.
Sequester.	Cuts in federal spending mandated by the Budget Control Act of 2011 that went into effect in March 2013. The cuts amount to $85 billion (about 2.3 percent of total federal spending) in fiscal 2013 and similar cuts are supposed to occur in every future year until 2021. The cuts are split evenly in dollar amounts between defense and non-defense sectors – Medicaid, Social Security, and a few small categories are exempt.
Shale gas.	Natural gas that is found trapped within shale formations (i.e., fine grained, organic-rich, sedimentary rock).
Social cost of carbon (SCC).	Refers to the net present value of damages (e.g., to agriculture, human health) due to the change in future global climate resulting from an additional ton of CO₂ emissions in a given year. It is expressed in monetary units and usually reflects worldwide damages (rather than damages to a particular country).
Starve the beast hypothesis.	According to this hypothesis, keeping down government revenues is an effective approach to curtailing government spending.
Supplemental Nutrition Action Payments (SNAP).	Formerly named Food Stamps, these payments help low-income households purchase food.
Supplemental Security Income (SSI) payments.	Stipends provided to low-income people who are 65 or older, blind, or disabled.
Tax credit.	An amount deducted from an individual’s or business’s tax liabilities.
Tax expenditure or preference.	Revenue losses attributable to provisions of tax laws which allow special exclusion, exemption, or deduction from gross income on which tax is assessed or which allow a special credit, preferential rate of tax, or a deferral of liability. Prominent examples include the favorable tax treatment of employer-provided medical insurance and mortgage interest for owner-occupied housing.
Ton.	Taken here to mean a metric tonne (1,000 kilograms). This is the standard unit for measuring CO₂ emissions (rather than a short ton, which is 2,000 pounds or 907 kilograms).
United Nations Framework Convention on Climate Change (UNFCCC).	This is an international environmental treaty produced at the 1992 Earth Summit. The treaty’s objective is to stabilize atmospheric GHG concentrations at a level that would prevent ‘dangerous interference with the climate system’. The treaty itself sets no mandatory emissions limits for individual countries and contains no enforcement mechanisms. Instead, it provides for updates (called ‘protocols’) that would set mandatory emission limits.
Upstream carbon tax.	In the present context, this refers to an emissions tax imposed at some point in the fossil fuel supply chain prior to fuel combustion, for example, it could be levied on petroleum refineries or coal processors. In extractive industries, ‘upstream’ refers to exploration and fuel production only (i.e., prior to fuel processing).
Waxman-Markey bill.	See American Clean Energy Security Act.
World Trade Organization (WTO).	An organization that seeks to promote and liberalize international trade.

Save
Cite
Email this content

Share Link

Copy this link, or click below to email it to a friend
Email this content
or copy the link directly:

https://www.elibrary.imf.org/abstract/book/9781138825369/front-1.xml
The link was not copied. Your current browser may not support copying via this button.

Link copied successfully

Implementing a US Carbon Tax

Challenges and Debates

Editor: Ian W.H. Parry

ISBN:: 9781138825369

Publication Date:: 01 Mar 2015

Publisher:: Routledge

DOI:: https://doi.org/10.5089/9781138825369.071

Pages:: 306

Abstract
Implementing a us Carbon Tax
Routledge Explorations in Environmental Economics
Implementing a us Carbon Tax
Contents
Figures
Tables
Foreword
Contributors
Summary for Policymakers
Glossary of Technical Terms and Abbreviations

Topics

Countries

Series

About

Resources

Abstract

Implementing a us Carbon Tax

Routledge Explorations in Environmental Economics

Implementing a us Carbon Tax

Contents

Figures

Tables

Foreword

Contributors

Summary for Policymakers

Carbon taxes in a fiscal context (Chapter 1)

Carbon taxes in an environmental context (Chapter 2)

Tax administration (Chapter 3)

Achieving emissions targets (Chapter 4)

Macroeconomic effects (Chapter 5)

Distributional effects (Chapter 6)

Targeted measures to help low-income households (Chapter 7)

Reforming corporate income taxes (Chapter 8)

Addressing competitiveness impacts (Chapter 9)

Complementing carbon taxes with technology policy (Chapter 10)

Opportunities for reforming power sector policies (Chapter 11)

Opportunities for reforming transportation policies (Chapter 12)

Promoting international mitigation efforts (Chapter 13)

Notes

References

Glossary of Technical Terms and Abbreviations

Share Link

Table of Contents

Sections

Metrics