A Carbon Tax, Explained

• Current policies to reduce carbon emissions include regulations that stifle the economy and subsidies that disproportionally benefit high earners and specific industries. These options are costly and have a limited impact on the environment.
• Another solution—a carbon tax—instead places a cost on those emissions, which makes any products and services derived from fossil fuels more expensive for businesses to produce and consumers to purchase.
  • Benefits: the higher prices lead to less consumption and encourage the creation and adoption of cleaner energy sources. This is a win for the environment, and it can also generate significant revenue.
  • Concerns: If designed poorly, the tax could increase costs, especially for low-income families, and ultimately slow the economy.
• Sound carbon tax design should be guided by three principles:
  • A carbon tax should cover the broadest range of polluting activities by taxing emissions at the source.
  • The tax should substitute existing environmental regulations.
  • Revenue from a carbon tax can be recycled to other policy priorities like reducing high tax rates or tackling the growing federal deficit.

Economic wisdom says, “if you want less of something, tax it.”

And one thing we all want less of are emissions that harm our environment.

Our current environmental solutions include regulations that stifle the economy, and subsidies that disproportionally benefit high earners and specific industries.

Both are costly and have a limited impact on the environment.

But there is another approach that’s often overlooked – a carbon tax.

Using fossil fuels creates harmful greenhouse gas emissions like carbon dioxide.

A carbon tax places a cost on those emissions, which makes any products and services derived from fossil fuels more expensive for businesses to produce and consumers to purchase.

These higher prices lead to less consumption and encourage the creation and adoption of cleaner energy sources.

This is a win for the environment, and it can also generate significant revenue.

But a carbon tax—like any other tax—isn’t a perfect solution.

If designed poorly, the tax could increase costs, especially for low-income families, and ultimately slow the economy.

But, if designed carefully, a carbon tax could actually be far more sustainable and efficient at improving our environment, as well as the economy.

Here are three principles for sound carbon tax design:

First, a carbon tax should cover the broadest possible range of polluting activities. This means taxing all carbon emissions at their source, not just targeting a single industry or activity.

Next, the tax should be a substitute for existing regulations like automotive and appliance standards, which provide minor environmental benefit at a high cost. A sufficient carbon tax could achieve similar or better environmental results at a much lower cost.

Finally, since the tax itself benefits the environment, the revenue it generates can be recycled to fund other priorities, like reducing high individual or corporate income taxes, improving tax treatment for business investment, or tackling the growing federal deficit.

Every policy has trade-offs, but a well-designed carbon tax has the potential to protect the environment without harming consumers, jobs, or businesses.