A Good Carbon Tax

A lack of international consensus, coupled with the economic slowdown, has made investment in greenhouse gas (GHG) mitigation programs extremely difficult at the national level.  Many, however, still insist that the costs of inaction justify strong policies to prevent climate change.  A recent article by Jenny Sumner, Lori Bird, and Hillary Dobos, “Carbon Taxes: A Review of Experience and Policy Considerations,” outlines the carbon taxation policies of several regions and countries.  The authors provide an overview of factors to consider when conceiving of new carbon tax policies, including program scope, program evaluation, tax rates, and revenue distribution.

The study does not evaluate the comparative economic and environmental benefits of a cap-and trade program versus a carbon tax policy. Rather, it suggests that cap-and-trade programs could work in tandem with carbon tax legislation to increase the scope and efficacy of current proposals. The authors argue that carbon taxes could serve as an important means to curb emissions from non-point emissions sources that are not not subject to emissions caps.  For instance, sectors that currently do not fall under the European Union ETS cap and trade system (such as transportation) could be made subject to carbon taxes.

The study also discusses ways to channel the proceeds from a taxation scheme. Depending on the objective of the program, the proceeds could be “1) directed specifically to carbon mitigation programs, 2) (re-)directed to individuals through measures such as reduction in income taxes, or 3) used to supplement government budgets.”

Carbon taxes in Boulder City, Colorado and California, for example, have been used to fund other carbon mitigation programs (BAAQMD and CARB). The authors suggest that policies be put in place that automatically increase tax rates if emissions increase or reduction goals are not met.  Careful use of tax revenues could significantly improve political acceptability.

Most importantly, the authors push for a more robust framework to assess the effectiveness of existing carbon tax programs. While most programs have relied on measurements of overall GHG emissions reduction through national or regional inventory data, the authors argue that these evaluations fail to isolate the effect of the tax independent of other factors such as economic growth and population increase. The impact of programs that are funded through carbon tax revenues must be measured, as well.

By examining experience with carbon tax policy in a variety of countries, this paper is a useful aide to policymakers designing similar programs. Yet the authors do not discuss the effect of carbon taxes on local industries that compete with firms in the developing world, sidestepping the important issue of whether or not carbon should be taxed at the border. More research evaluating the relative success of taxation policies across the world that accounts for carbon leakage should be on the docket.