Seven proposals for pricing mechanisms to reduce greenhouse gas emissions have been introduced in the 111th Congress. The Carbon Tax Center provides an overview, grouping similar bills together, followed by a more detailed analysis.
About the PCC
Tax Bad Things Like Pollution, Reward Good Things Like Work!
A price on carbon would be the quickest and most effective way to reduce greenhouse gas emissions, create incentives for renewable energy and efficiency, and generate green jobs. Fees could be returned to citizens as payroll tax relief or as dividends to promote economic equity.
Fossil fuel (coal, oil and gas) producers and importers would pay a tax in proportion to those fuels’ carbon content. The tax would be collected upstream—at the mine, wellhead, or port. Coal releases the most carbon per unit of energy, oil is in the middle and gas is the least carbon-polluting fossil fuel. The carbon tax would reflect those proportions. Prices of products and services that use fossil fuels would rise as producers passed their carbon tax costs downstream. For example, electricity produced from coal would gradually get more expensive, while electricity produced from wind would not.
How would a carbon tax help reduce global warming? answer
We all make dozens of choices every day that add up to a vast effect on our climate. Do I wear warm clothes or turn up the heat? Do I rent an apartment near transit or my job or do I go for the “cheaper” one that means a daily car commute? When we all expect fossil fuel prices to rise gradually, we’ll start making low-carbon decisions and planning ahead to do even more. We noticed how travel patterns changed when motor fuel prices rose. Similarly, we’d find ways to save electricity and generate more of it from wind, shift to cleaner fuels, buy more locally-produced products, insulate our houses and buy more efficient appliances because we’d know that it would pay us to make those decisions. Just as importantly, a carbon tax would provide clear, predictable price signals to entrepreneurs and innovators that efforts to develop and implement low-carbon, renewable energy will become increasingly profitable.
The Carbon Tax Center recommends a starter carbon tax of 10 cents per gallon of gasoline (higher per energy equivalent of coal and lower for natural gas), rising that amount for ten years. The total carbon tax for an average person would start at $180/year and rise to $1,800 per year after ten years. (Note that consumers wouldn’t pay a carbon tax bill per se, it would just show up in the prices of things you buy.) That carbon tax rate would generate about $50 billion in the first year, rising to $500 billion in the tenth year.
What does a "revenue neutral" carbon tax mean? answer
We advocate “recycling” all or substantially all of the revenue from a carbon tax back into the economy. That way the tax won’t drag down the economy. We suggest two ways to make the tax revenue-neutral: One is by using carbon tax revenue to reduce other taxes. We propose reducing the payroll tax by raising the amount of income that anyone can earn each year without paying any payroll tax. Reduced payroll taxes would make it more attractive to hire new employees and would mean bigger paychecks. Another very effective way to recycle carbon tax revenue is by distributing it to everyone in the country by a check or direct deposit. We sometimes call that a “carbon dividend.” Under either plan, people who use less than average amounts of fossil fuels would get more money back than the increased prices they paid for fossil fuels and products made with them.
Would revenue-neutral carbon tax affect lower/middle-income people? answer
Because we generally use less fossil fuel than average, low and moderate-income people would receive more benefit from a payroll tax shift or a dividend than we’d pay in increased fuel and downstream product prices. But people at all income levels would have an incentive to conserve or switch to renewable energy. The amount of a carbon tax rises in proportional to fossil fuel consumption, while the tax shift or dividend is constant. Conservation would reduce your carbon tax, but not your carbon tax benefit from a payroll tax shift or a carbon dividend.
How is a carbon tax better than cap-and-trade? answer
In short, a carbon tax is simpler, easier to enforce and economists agree it’s far more effective. Cap and trade programs in the European Union, California and Japan have produced little or no net greenhouse gas reductions but have caused serious economic disruptions and increased energy costs. Cap and trade is a complex, hidden carbon tax that would require fossil fuel producers to buy permits at auction. But auctioning and trading of permits, much like trading of stocks, commodities, real estate or hedge funds involves price volatility. The market for carbon permits would shift in response to changes in energy supply and demand, the perceptions of traders and those who bought pollution permits for investments, and speculative manipulation. Permits under the EPA cap-and-trade program for sulfur emissions have jumped as much as 50% in a month. Predictable prices under a gradually increasing tax would help everyone plan and invest more effectively.
A carbon tax could be implemented quickly, while cap-and-trade systems involve struggles over allocating the permits and setting an agreed-upon cap. Cap-and-trade systems typically do not return the revenue but instead represent a hidden tax. Current proposals divert revenue to the very same polluters that they are intended to curb.
