In recent years, several carbon tax proposals have been presented to Congress. Five CO2 pricing proposals were presented to the 117th Congress (2021-2022) (October 2021), and the Senate Finance Committee is reportedly considering including a carbon price in the Build Back Better Act, the reconciliation package backed by the Biden administration. Currently, the public bears the costs of these impacts. The goal of carbon pricing is to shift responsibility for these costs to those who cause the emissions. If producers and consumers have to pay for every tonne of CO2 they emit, they have an economic incentive to move away from fossil fuels, improve their energy efficiency and invest in low-carbon technologies. On average, emissions covered by carbon pricing initiatives account for about half of the greenhouse gas emissions of countries with ETS and/or carbon taxes. This corresponds to a total coverage of about 8 GtCO2e, or about 15% of global greenhouse gas emissions. Emissions covered by carbon pricing have almost quadrupled over the past decade. In April 2016, the High-Level Panel on Carbon Pricing, a group of heads of government and international organizations, set a global goal of doubling emissions covered by carbon pricing initiatives to 25% by 2020 and doubling this coverage again within a decade. For more information on how to cover greenhouse gas emissions from initiatives, see the interactive graphic. In the United States, interest in a macroeconomic carbon tax has gradually increased. The debate often revolves around how revenue from a tax can be used. One idea is to use the revenues to reduce taxes on productive activities such as wages or corporate taxes.
Other ideas include returning to all consumers in the form of a carbon dividend or using it to fund infrastructure improvements. A 2017 study estimates that a tax of $49 per ton of carbon dioxide over 10 years could generate about $2.2 trillion in net revenue from 2019 to 2028. In July, several Democrats in Congress proposed including a carbon border adjustment tax in the $3.5 trillion bill on the budget currently under negotiation. Overall, adjustments to carbon limits are intended to protect domestic firms from unfair competition with firms producing in countries with weaker greenhouse gas regulations. This has several advantages. First, it ensures that domestic and foreign companies face similar production costs. Second, it discourages domestic companies from relocating production in response to stricter climate regulations. This not only protects domestic jobs, but also reduces the potential for carbon leakage, where environmental regulations do not reduce emissions, but simply facilitate offshoring. Third, the possibility of imposing tariffs can encourage countries and companies to improve their environmental practices. It is difficult to adjust carbon limits, even with a carbon price.
In theory, policymakers determine the rate of adaptation to carbon limits by aligning with the domestic carbon price, ensuring that all companies – foreign and domestic – pay the same price for emissions generated during production. However, they are then faced with the decision of which goods should be subject to customs, which trading partners should be exempted, and how and whether other greenhouse gas regulations should be factored into the adjustment. In the absence of a domestic carbon price, establishing a fair price for adjusting limits involves calculating an effective carbon price based on existing environmental and emissions regulations. Resources for the Future describes an approach whereby importing companies are exempted from the marginal adjustment to the average level of carbon emissions on a sectoral basis and then charge a charge per tonne based on the estimated marginal cost of reducing emissions. Such and similar approaches would be extremely complex for both managing authorities and importing companies. In addition, it would be subject to inaccuracies, as companies in the same sector could still face a wide range of effective carbon prices due to different regulatory frameworks between states. Carbon pricing can reverse this trend. The introduction of a sufficiently high carbon price should have a significant impact on carbon emissions. A 2019 report by the Brookings Institution predicts that a carbon tax of $25 per tonne, increasing by one percent per year, would reduce emissions by 17 to 38 percent by 2030 from the 2005 baseline. According to their calculations, a carbon tax of $50 per tonne, increasing by five percent per year, would reduce emissions by 26 to 47 percent from 2005 levels — up to 90 percent of the reductions needed to meet President Biden`s Paris Agreement goal.
International carbon pricing refers to carbon pricing initiatives that have the potential to cover the entire world. These include: Carbon pricing is a policy tool to reduce emissions of carbon dioxide (CO2) and other greenhouse gases. Emissions occur when fossil fuels are burned, for example to generate electricity, power vehicles, produce materials and products, heat and cool homes. These emissions are the main cause of climate change, leading to floods, rising sea levels, drought, heat waves and other costs to society. While there are significant differences between the two systems, the main benefit of carbon pricing remains the same: carbon pricing requires companies to internalize the cost of carbon emitted during production, which requires them to factor the cost of environmental damage into their production decisions. In 2012, demand for Kyoto credits – certified emission reductions (CERs) from CDMs and emission reduction units (ERUs) from joint implementation – began to saturate. It became clear that the Kyoto appropriations already spent were sufficient to meet most of the demand, including from the EU, which has always been the largest source of demand. As there is currently no other major source of demand for Kyoto credits, this has led to a persistent decline in CER and ERU prices. Some national carbon pricing initiatives offer the possibility of applying for CERs, such as in Colombia, Mexico, Korea and South Africa, although only certain types of CERs are accepted in these initiatives and demand is limited. The future Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) could represent an important new source of CER demand.
International emissions trading (EIT) is an international emissions trading scheme established to enable Annex I countries to reduce their emissions at the lowest possible cost. However, individual countries have made policy choices based on other priorities and national contexts, and have not necessarily optimized their efforts to reduce emissions solely on the basis of carbon pricing. This heterogeneity of national policies meant that the EIT did not achieve a cost-effective outcome as originally intended. EIT has also been hampered by a lack of clarity on environmental outcomes, which has undermined its appeal to government buyers. Carbon pricing initiatives will continue to be refined, adapted to new circumstances and lessons learned. Current carbon pricing initiatives are evolving based on past experience, and future initiatives seek to learn from these experiences in their design. The voluntary market meets the needs of companies that voluntarily choose to reduce their carbon footprint through offsetting. In 2016, the volume of credits traded on voluntary markets amounted to 63 Mt of CO2 equivalent for a value of US$191 million, a decrease of 24% compared to the 84 Mt of CO2 equivalent of credits traded in 2015. The decrease in traded volume is partly due to the conversion of certain types of voluntary credits into compliance offsets under mandatory carbon pricing initiatives, such as California`s cap and trade program. Carbon pricing is a cost-effective way to reduce greenhouse gas emissions.
Twelve countries already set carbon prices and a number of states are considering similar measures. This fact sheet summarizes and compares five federal carbon pricing proposals that have been introduced – Taxation point – A carbon tax can be levied at any point in the energy supply chain. The simplest administrative approach is to levy the “input” tax where very few businesses would be subject to it (for example, coal suppliers, natural gas processing plants and oil refineries). Alternatively, the tax could be levied “intermediate” (electricity suppliers) or downstream (energy-consuming industries, households or vehicles). Tax and indexation rates Economic theory suggests that a carbon tax should be equal to the social cost of carbon, which is the present value of the estimated environmental damage over time caused by an additional tonne of carbon dioxide emitted today. The tax rate is also expected to increase over time to account for the growing damage caused by climate change. Higher prices over time also tell issuers that they need to do more and that their investments in more aggressive technologies are economically justified. One of the challenges of a carbon tax is to predict the reduction in emissions resulting from a given tax rate. The inclusion of verification and adjustment options can help, but also reduces one of the values of a carbon price – price certainty.