TO: Political Office
FROM: Sara Alemayehu, Gillian Garnett, Lindsey Hatcher, Jasmine Padgett,
Artem Protsenko, Tessa Shelton, Anonymous Student
DATE: October 27, 2021
TOPIC: Carbon Taxes & Pricing
Carbon dioxide and other greenhouse gas emissions have been rising since the Industrial Revolution. A carbon tax is a way to incentivize industries and people to lower their emissions by putting a set price per ton of carbon emitted. Compared to a cap-and-trade program, which puts a limit on emissions and establishes a market for allowances to pollute, a carbon tax may be more effective. The price per ton of carbon can be modified as seen fit, so increasing the tax over time will further encourage reduced emissions. This can encourage the energy market to gradually shift towards renewable energy. The revenue from the carbon tax could be put towards dividends for lower-income households, investments in clean energy, or used to offset other budgetary costs. Recommendation: Implement a carbon tax to reap the benefits of the profits and provide dividends, but also consider the advantages of a cap-and-trade program as another carbon pricing measure to propose.
If enacted, a carbon tax would:
- Increase the price of potentially any targeted goods in the market that emit greenhouse gases, such as gasoline and electricity, making consumers more energy-efficient and reducing emissions.
- Stimulate the development of new carbon-free technologies.
- Replace expensive subsidies and administrative regulations with transparent and reliable initiatives.
- Generate more than 1 trillion dollars over a decade, which could cover energy costs for low-income families, as well as fund clean energy infrastructure.
- Create market-based financial opportunities, providing competitive advantage for low-carbon businesses and increasing financial opportunities for them.
- Make renewable energy options comparatively more affordable.
Pros: In recent years, legislators, businesses, and climate action groups have voiced support for the United States to enact carbon pricing to incentivize individuals, industry, and governments to reduce their carbon emissions. Putting a number on the price of carbon would help assimilate climate risks into how much it costs a business to produce its goods. The effectiveness of a cap-and-trade approach, albeit different from a carbon tax, has already been illustrated on a regional scale with demonstrated success by the Regional Greenhouse Gas Initiative, of which Virginia is a member. The net economic benefit to states of $4.7 billion between 2009 and 2017 is a strong indicator that market-based approaches to carbon emissions are not only environmentally beneficial but economically favorable as well. Moreover, American economists have long argued that a consumption-based and well-designed carbon tax is the most economically efficient way to reduce carbon emissions and further environmental degradation. Carbon prices allow for innovation and development in clean energy. By providing a framework to encourage enterprise in renewable energy, more jobs in renewable energy will be created, which then allows for further environmental measures preventing climate change to become more feasible. Further, as reported by the Tax Foundation, tax revenue from carbon taxes can support employee-side payroll tax cuts, investments in innovation and infrastructure, and carbon dividends. Additionally, the Congressional Budget Office concludes that the U.S. national debt could be reduced by billions each year through an energy-related tax of $25 per metric ton of carbon emissions to increase at 5% per year.
Cons: Some economists warn that a carbon tax can be regressive. Raising the cost of fossil fuels will harm low-income citizens, forcing them to pay a higher percentage of their income for electricity and gasoline. Further, people and enterprises within communities that support carbon-intensive industries such as coal mining could experience job displacement, which would rupture local and regional economies. A transitional policy that develops renewable energy within local and regional economies and provides fossil fuel industries a framework for how to become carbon-neutral will be needed, such as the current strategy of Dominion Energy. Additionally, previous analyses of carbon taxes have concluded that applying the policy to a specific sector is less fair and efficient than simply mandating that all sectors of importance–energy, transportation, industry, agriculture, etc.–are subject to carbon pricing. Lastly some industries, such as agriculture, emit carbon dioxide through some activities and capture carbon dioxide through others. These types of industries would require compensation for reducing their carbon emissions.
Analysis: The carbon tax is one of the simplest ways to reduce carbon emissions through incentivizing lower emissions rather than mandating them. Additionally, the majority of Americans believe that Congress should be more active in its response to climate change, and this policy would show significant initiative on the national level. Modern innovation has produced green technology such as solar energy, geothermal energy, methane capture, carbon capture, and energy-efficient buildings to reduce carbon emissions, but leaders need increased motivation to invest in these alternatives. Carbon taxes and pricing would be the catalyst to increase environmental protection. While the full cost of goods with the addition of the carbon tax will be greater, this discourages both consumers from purchasing and producers from creating carbon-intensive goods, ultimately leading to lower carbon emissions. The carbon tax allows resources to be redirected to governments, businesses, consumers, and taxpayers in varying degrees, encouraging all levels to better address climate change by utilizing increased revenue to invest in industries and projects that fully confront the issue of climate change. As a result, a positive feedback loop is created where carbon pricing reinforces governmental, industrial, and societal functions while reducing carbon byproducts, eventually diminishing the need for federal involvement and regulation to curb carbon emissions in the future.
Important take-away points:
- Pollution in lower-income communities can be reduced by a carbon tax, which also reduces health risks of the individuals living in these communities.
- Economic theory suggests that emissions pricing through a carbon tax will produce the highest net benefits for the environment and human health despite the initial economic costs. The current marginal damage and social cost of carbon emissions is at an unsustainable level for both people and the planet.
- Carbon taxes can be levied at different places in the energy supply chain: upstream at producers, downstream at users, or on industries like utilities that sit in the middle.
- Carbon pricing can cause greater investment towards renewable energy businesses and jobs.
Virginia Angle: Virginia is already on the path to 100% clean energy by 2045 with the Virginia Senate Bill 851 passed in March of 2020 by Virginia Governor Ralph Northam requiring the state to acquire electricity through carbon-free sources. The state is already a member of the Regional Greenhouse Gas Initiative, which has cut electricity emissions of carbon dioxide in the participating states by 48% in ten years. Federal carbon pricing would help support the goals of Virginia’s plan of carbon-free electricity by 2045. Implementing a carbon tax or a cap-and-trade program will help to encourage the development and preference of more sustainable sources of energy, which can also help incentivize the state to reach this goal. Dividends from tax revenues could also benefit low-income communities in Virginia that are currently being burdened by fossil fuel plant pollution and who might be most affected by subsequent price fluctuations that follow the application of carbon pricing.