Carbon Taxes: Theory and Practice

In theory, the carbon tax is the most efficient approach to address climate change. In practice, however, the policymaking process can interfere and weaken the policy.

Introduction

The carbon tax is a common idea among economists as a way to stop climate change.[1]

In general, the case for the carbon tax is easy to see. Find out how much carbon pollution cost society as a whole, and then tax them at that rate. The method has a lot of benefits. One is that it lets the market figure out the best way to cut emissions. Also, it is a single, all-encompassing climate policy that replaces many interlocking sector- and industry-level subsidies, rules, and narrow excise taxes with a single, all-encompassing policy. Unlike other climate policies, carbon taxes also bring in money, which can be used to lower other, more harmful taxes. This means that the policy can help both the environment and the economy.

But carbon taxes and their related idea, cap and trade, are not just ideas.[2] As of April 2022, 70 regional, national, and local carbon price plans around the world cover more than 23% of all CO2 emissions worldwide.[3] The 36 carbon taxes that are already in place cover 5,7% of all CO2 pollution around the world.

It can be hard to turn a thought from basic economic theory into policy. Even though it's easy to say that "a carbon tax might make sense in theory, but in practice it wouldn't bring about these benefits," this is a real worry. But now that dozens of carbon taxes have been put in place around the world, we can see how these theoretical points have played out in real life. We don't need to theorize about the administrative problems that might come up.

When it comes to big economic questions, the evidence is good. With relatively low costs, carbon taxes have helped cut down on carbon pollution. Most of the money brought in has either been used to lower taxes already in place or to make up for possible tax hikes, which has often improved economic growth on net. But there aren't as many examples of how the carbon tax would cut the Gordian Knot of climate policy. Many carbon taxes only cover a part of pollution and work with other policies like regulations and subsidies instead of being a single policy that covers everything.

Emissions

Emissions: In Theory

Emissions will go down because of carbon taxes. But how much the price goes down depends on how elastic people are, or how sensitive they are to changes in prices. If the price elasticity of emissions is high, people will stop burning to avoid paying the tax, which will lead to a big drop in emissions. If the price elasticity of pollution is low, most polluters will just pay the tax instead of changing how they act.

The Energy Modeling Forum (EMF) recently put together a meta-analysis of 11 different models of four different carbon tax scenarios: a $25 carbon tax that goes up by 1% per year, a $25 carbon tax that goes up by 5% per year, a $50 carbon tax that goes up by 1% per year, and a $50 carbon tax that goes up by 5% per year.[4] These are big steps toward lowering carbon pollution.
Emissions Reduction Estimate Ranges from Energy Modeling Forum

Scenario	Range of Emissions Reductions after 5 Years	Range of Emissions Reductions after 15 Years
$25 per ton, rising 1% per year	16-28%	17-38%
$50 per ton, rising 5% per year	21-35%	26-47%*
Source: Alexander R. Barron, Allen A. Fawcett, Marc A. Hafstead, James R. McFarland, and Adele C. Morris, “Policy Insights from the EMF 32 Study on U.S. Carbon Tax Scenarios,” Climate Change Economics 9:1 (2018), https://www.worldscientific.com/doi/10.1142/S2010007818400031. *One model with more aggressive assumptions about the impact of carbon taxes on carbon emissions did not run a $50 per ton carbon tax rising at 5 percent per year, meaning there may be larger higher-end scenarios.

One thing that all of the EMF models agree on is that the electricity sector would respond to the carbon tax the most, causing most of the overall emissions to go down.

The EMF project also points out that the model has some flaws. Part of the theoretical case for carbon taxes is that they will make it more likely that new, low-emission or no-emission technologies will be developed. However, it's hard to model big technical leaps. With the technology we have now, models can predict how people would react to a carbon tax. However, they are less good at predicting how technology will change in the future. For example, a model can predict that a carbon tax that raises gas prices won't greatly cut the number of miles driven because driving isn't very sensitive to price changes. However, it can't accurately predict how demand for electric cars will change or how the technology behind them will change.

Still, there is a lot of data that shows that rising energy prices drive energy innovation.[5] When the idea of induced innovation is used to model carbon taxes, the result is a 19% more effective decrease in emissions.[6]

International markets are another thing that makes it hard to know how a carbon tax will affect pollution. Offshoring of pollution, also called "carbon leakage," is a worry about a carbon tax and many other measures meant to protect the environment.[7] The idea behind this is simple: if the cost of pollution goes up in the taxed area, polluters will simply move their operations to an area where pollution isn't taxed and continue to sell their goods to people in the taxed area. In this case, even though carbon emissions in the U.S. go down, carbon emissions around the world don't change, and the U.S. economy suffers as polluting businesses move overseas.

There is, however, one cause that suggests carbon taxes in one place could also lower pollution in other places: innovation.[8] When a large country sets a price on carbon that encourages the development of green technology, other countries that don't have carbon taxes may be able to afford to use that technology in the long run.

Effects on Emissions: In Practice

As basic economic theory says, there is proof that carbon taxes do reduce emissions. The effects on pollution depend a lot on how much and how wide the tax is.

Most of the carbon taxes that have been around for a long time are not as good as the perfect policy in a number of ways. For the purpose of talking about carbon taxes that are already in place and how they affect pollution, the tax base is the most important difference from an ideal policy. Many carbon taxes leave out a big chunk of the tax base. Because of this, the "carbon tax" doesn't cut pollution as much as a real tax on all carbon emissions would. Below is a short discussion of carbon taxes that have been around for a few years, cover fairly big economic areas, and have rates of at least $5 per ton of carbon and a tax base of at least 20% of domestic carbon emissions.[9]

Sweden's, British Columbia's, and the UK's carbon taxes are good examples of some of the many carbon taxes that are already in place. Since the policies have been around for a long time, economic actors have had plenty of time to react and economists have had plenty of time to study the effects.[10] All of the carbon taxes are put on a non-trivial share of the country's carbon emissions at a rate that is economically important. This means that we can expect them to have an effect on emissions.[11] All of the economies are pretty big, which makes it more likely that there is more study and takes away some of the quirks that come with being a small country.[12]

Sweden, British Columbia, and the United Kingdom are not the only places that meet these conditions. Switzerland and the three other Nordic countries, Finland, Norway, and Denmark, could have also qualified. But Sweden has the biggest economy of the four Nordic countries, and Sweden, British Columbia, and the United Kingdom offer a wide range of examples: a Nordic country, a North American province, and a Western European country. Also, this paper is not just about these three carbon taxes. We will talk about carbon taxes in other places, like Australia's cancelled carbon tax, in the context of other interesting factors.

Sweden

In 1991, Sweden put in place a tax on carbon. At first, the carbon tax was $26 per ton (in U.S. dollars). By 2004, it was around $95 per ton, and it is now $130 per ton. It covers about 40% of Sweden's carbon emissions. However, it doesn't include emissions from the industry sector that are covered by the EU's emissions trading system (ETS), which is a cap-and-trade carbon pricing system at the EU level. Most of the tax is put on fossil fuels that are used for heating and driving.[13] The carbon tax, on the other hand, was just one of many environmental policies that Sweden has put in place since the 1990s.[14]

When Sweden put in place its carbon tax, officials cut a separate, large tax on energy use, but kept it in place. So, even though the carbon tax rate was high, the overall tax rate on power was not as high as you might think it would be based on the high carbon tax rate.[15] Also, a lot of carbon was already taken out of the Swedish energy sector. In 1991, 95 percent of Sweden's electricity came from either nuclear or hydroelectric power.[16] Still, Sweden's carbon dioxide pollution went down by more than 37% between 1991 and 2021.[17] A real-world look at Sweden's carbon tax showed that it cut transportation pollution by 6%.[18] Even though it does reduce emissions, it doesn't seem to be as big of a deal as what a carbon tax, which was modeled in the EMF studies, could do to reduce emissions. But when you think about how Sweden's energy sector was already mostly free of carbon, the smaller cut makes more sense.

British Columbia

In 2008, British Columbia, a province in Canada, put in place a tax on carbon.

Sweden is not as good of an example as British Columbia. Instead of putting a high tax on a small group of people, the British Columbia tax put a low to middling tax on a large group of people. From what we know, it looks like the tax has cut down on pollution. When the tax was first put in place, it cut total pollution by between 5 and 15% in the first few years.[19] This includes a 4 percent drop in emissions from manufacturing and an 8 percent drop in emissions from gasoline for private cars. However, emissions from commercial diesel vehicles dropped by less.[20]

Even though there are some weird things about British Columbia's baseline, the successful lowering of emissions shows that a carbon tax can work. As we've already talked about, most modeling shows that carbon taxes have the biggest effect on emissions in the power production sector. This is because they give producers an incentive to move from coal to natural gas or renewable energy. But when British Columbia put the carbon tax in place, hydroelectric power was already providing most of the province's energy.[21]

United Kingdom

In 2013, the United Kingdom put in place a tax on carbon. The UK's carbon tax is different from the ones in Scandinavia and British Columbia. Even though the UK tax rate is low (around $23 per ton) and the tax base is small (it only covers 21% of emissions), the UK carbon tax is based on the power generation sector, which is much more responsive to taxes.

Between 2013 and 2016, the UK's pollution dropped by a lot.[22] The relatively small carbon tax cut carbon emissions from the power industry by 20–26%, and overall emissions were cut by 6.2%, even though it only applied to a small part of total emissions.[23] The UK's emissions figures by sector show that the carbon tax has had a clear effect, since the power sector was always the largest source of emissions before the tax was put in place. The tax wasn't the only reason for the drop, but it was one of the biggest ones. In the power sector, the biggest factor in lowering pollution was moving away from coal as a fuel source. In 2012, coal made up almost 40 percent of the fuel used to make electricity in the UK. By 2021, coal would make up less than 2 percent of the fuel used to make electricity in the UK.[24]


So, carbon taxes in Sweden and British Columbia led to small reductions in carbon emissions, but a narrow carbon tax focused on the power sector in the United Kingdom led to big reductions in carbon emissions. How should we use what happened in Sweden, British Columbia, and the UK to figure out how effective a carbon tax in the U.S. would be at lowering emissions? Since the power sector is where the carbon tax has the biggest effect, it's important to think about how the U.S. makes energy and how it compares to Sweden, British Columbia, and the UK at the time they put their carbon taxes in place. The United States still gets most of its energy from fossil fuels, which is different from Sweden and British Columbia before they put a tax on carbon, but similar to the United Kingdom before it put a tax on carbon, where emissions dropped quickly after the tax was put in place.

Putting aside the sector-by-sector question, if the United States put a tax on carbon, it could lead to more innovation and lower emissions in sectors other than power production, which is what other carbon taxes have done. Sweden and British Columbia aren't very big markets, and even before the carbon tax, they didn't make up much of the world's pollution. So, we wouldn't think that adding more incentives for new, low-emission technology there would greatly change the way technology is developed everywhere else. On the other hand, the U.S. has both a big economy and a big carbon footprint. As was already said, carbon taxes apply to about 5.7% of the world's pollution. If the US put a tax on carbon, the amount of world emissions that would be covered would go from 5.7% to 19.3%.[25]

As an example, carbon pricing doesn't seem to have much of an effect on the transportation sector because people don't drive much less when gas costs go up.[26] That means customers are not responding at the intensive margin, which is how much they drive their gas-powered car. Especially in a large market like the U.S., a carbon tax could have a bigger effect on the extensive margin. This means that when customers choose which car to buy, they will be more likely to choose an electric car, which could speed up the adoption of electric cars elsewhere.

Macroeconomic Effects

A tax on carbon could have important effects on the business as a whole. In the U.S., for example, a broad-based carbon tax with a fairly low rate of $25 per ton would bring in about $1 trillion in tax money over ten years.[27] There are a few big things to worry about: how the tax will affect economic growth, how the tax load will be shared, and (related to both growth and distribution) how the tax money will be spent.

Effects on Economic Growth: Theory

The debate over how a carbon tax affects economic growth is based on two ideas that are at odds with each other.

The first is the "double dividend effect," which is a more positive way to look at the carbon tax. It says that a carbon tax can help the environment and the economy, with the latter benefit being that it can bring in money to pay for pro-growth tax changes. As a general rule, it is not possible to say whether or not a double payout is legal. The possible benefits of a tax swap, in which one tax is lowered and a carbon tax is added, depend on what taxes are already in place in a given area.

If the current tax system isn't well thought out, there would be plenty of ways to make it better that could be combined with a carbon tax to make the economy grow overall. But if the current tax system is pretty close to the best one, it would be harder to put together a net pro-growth plan. Most of the time, taxes on labor and consumption hurt growth more than taxes on wealth.[28] A carbon tax can be thought of as a type of a consumption tax that is a little bit more unfair.[29] Because of this, economic growth is more likely to be good if carbon taxes are paired with lower corporate or personal income taxes.

The second is the tax interaction effect, which is often used by people who don't like the carbon tax.[30] The tax interaction effect suggests that a carbon tax, even if paired with lower tax rates, could be net harmful to the economy in a tax policy status quo with significant distortionary policies. This is because carbon taxes could further distort factor prices when added to existing (but lower) distortionary taxes.[31] This point of view also says that a carbon tax should be set up as a tax on intermediate sources instead of a narrow consumption tax.

The conclusion of the interaction effect is not necessarily that any carbon tax will be net bad for the economy (ignoring the long-term environmental benefits). However, the fact that the interaction effect exists means that the optimal carbon tax rate may be lower than the theoretical Pigouvian tax rate, and the fact that other distortionary taxes already exist could hurt the case for a carbon tax and a double dividend rather than help it.

Several studies compare how different plans for reusing money affect the economy as a whole. Most people agree that carbon taxes and lower taxes on capital lead to net positive economic growth. But there is more debate about how the money from the carbon tax could be used to lower other taxes, like taxes on labor.[32]

The Tax Foundation has done several studies that show this to be true. At first, we tried to figure out how to pair a carbon tax with three different ways to re-use the money: a payroll tax cut, a uniform cash payment, and a cut in capital taxes.[33] The Tax Foundation found that the capital tax cut package led to the most growth, even though it ended up raising taxes on lower-income families overall. The universal cash payment plan, on the other hand, gave low-income households a big boost while slowing growth, and the payroll tax cut package had a small effect on both growth and the after-tax income of low-income households.

Recent study by the Tax Foundation has looked at mixed revenue recycling plans, in which some revenue is used for lump-sum cash payments and some revenue is used for capital tax cuts (that is, for making it easier for the cost of capital investments to be recouped). The models showed that a balance between the two could lead to results that were both good for growth and fair for everyone.[34]
Tax Foundation Modeling of Revenue Recycling Packages for Carbon Taxes, Selected Results

Carbon Tax Package	Percent Change in GDP
$50 Carbon Tax	-0.4%
$50 Carbon Tax, Dividend of $1,057	-0.4%
$50 Carbon Tax, Reduce Payroll Tax 2.24%	+0.1%
$50 Carbon Tax, Expensing for R&D, Permanence for Bonus Depreciation, 11% Corporate Tax Rate	+0.8%
$60 Carbon Tax Paired with Permanence for TCJA Individual Provisions	+1.0%*
$50 Carbon Tax, Expensing for Capital Investment, $100 Dividend	+1.8%
$50 Carbon Tax, Expensing for R&D, Permanence for Bonus Depreciation, $445 Dividend	+0.2%
Note: *Long-run economic growth score of pairing a carbon tax with TCJA permanence is somewhat overstated, as for the first few years of the budget window in that analysis, TCJA individual permanence has no cost because most provisions do not expire until 2025. Sources: Kyle Pomerleau and Elke Asen, “Carbon Tax and Revenue Recycling: Revenue, Economic, and Distributional Implications,” Tax Foundation, Nov. 6, 2019, https://taxfoundation.org/carbon-tax/; Elke Asen, “A Carbon Tax to Make the Individual Provisions of the TCJA Permanent,” Tax Foundation, Sep. 30, 2020, https://taxfoundation.org/carbon-tax-to-make-the-tcja-individual-provisions-permanent/; Alex Muresianu and Huaqun Li, “Carbon Taxes and the Future of Green Tax Reform,” Tax Foundation, Jun. 21, 2022, https://taxfoundation.org/carbon-taxes-green-tax-reforms/.

Effects on Economic Growth: In Practice

Most research on how carbon taxes affect the economy shows that they don't slow growth by much and, in fact, are often linked to faster growth.

A recent study of European countries with and without carbon taxes found that countries with carbon taxes had slightly faster economic growth than countries without them.[35] Now, that doesn't prove that carbon taxes alone cause growth, but it does support the idea that carbon taxes can replace tax income from other, more distorting sources and lead to net economic growth.

Compared to theoretical studies, there aren't that many strong analyses of the effects of individual carbon taxes on the economy after the fact. In the case of British Columbia, the strategy has had almost no effect on the economy. In fact, one study found that the revenue-recycling package had led to more growth.[36] Other studies of the effects of British Columbia's carbon tax reform on things like employment and industrial efficiency found positive effects.[37] Sweden's carbon tax was put in place as part of a large package of changes, which makes it even harder to figure out the effects of the tax on its own. Australia's carbon tax, on the other hand, is often used as an example of what not to do. However, the policy was quickly changed, so it's hard to know how it affected the economy beyond projections and short-term effects on jobs.[38]

Differences between British Columbia and Australia can be partly explained by how they choose to recycle their money. Along with British Columbia's carbon tax, corporate and individual marginal tax rates went down by a lot. The corporate tax rate went from 12% to 10%, the small business tax rate went from 4.5 to 2.5%, and the bottom two personal income tax brackets went from 5.35 to 8.15% to 5.06 and 7.7%, respectively.[39] At first, almost all of the money used came from lower marginal rates and a credit for low-income families to help with distributional issues. However, over time, some of the extra money has been put toward more targeted subsidies.[40] In Australia, on the other hand, a big chunk of the money was put toward tailored subsidy programs from the start. The Australian carbon tax also included transfer payments and lower income tax brackets for the poorest people. However, it did not make a big difference in the business tax situation by making structural changes to the tax system as a whole.[41]

Another big difference between Australia and British Columbia is that Australia's carbon tax started right away at $23 per ton, while British Columbia's started at $10 per ton in 2008 and went up by $5 per ton every year until it reached $30 per ton in 2012.[42] By putting the tax in place gradually, consumers and businesses in British Columbia had time to change their behavior to prepare for the tax's effects. In Australia, on the other hand, the tax went into effect right away, and a poor revenue recycling scheme meant that consumers and businesses had little choice but to pay the tax's costs.[43]

In the end, it is hard to separate the effect of a change in the carbon tax on GDP growth as a whole. This is because carbon tax rates and bases vary from country to country, as do income recycling schemes. Still, the evidence we have so far points to a small effect on GDP in either way.

Distribution and Revenue Recycling: In Theory

There are also questions about how the money from the tax would be split up. Most of the time, taxes that are more harmful, like business and personal income taxes, are also more progressive. A carbon tax, on the other hand, is at least a little bit regressive. So, a big worry about trading a carbon tax for a corporate tax cut is that it would be very regressive, meaning that it would raise taxes on low-income families while cutting taxes for the wealthy.[44] Some supporters of a carbon tax have given up on the idea of a pro-growth tax swap because of these distributional concerns. Instead, they are pushing for all of the revenue to be used for universal cash payments, which would raise after-tax incomes for poorer families but not increase long-term growth.[45] Growth and fairness can both be taken into account if the money is used for different things.

Modeling how a carbon tax affects different groups of people depends on what assumptions are made about it. Some people think of a carbon tax as a tax on what people buy, while others think of it as a tax on what people buy in between. The consumption tax option is thought to have a smaller effect on economic growth but a more regressive way of spreading the tax burden. The middle input option, on the other hand, is thought to have a bigger effect on economic growth but a more proportional way of spreading the tax burden.

When modeling the distributional effects of the carbon tax, one must also decide whether to compare the burden to yearly income or to lifetime income.[46] By measuring the tax burden based on lifetime income, the tax burden is spread out more evenly. This is because many taxpayers, like retirees and college students, may have a low yearly income in a given year but a high income over their lifetime. In many ways, lifetime income is a better way to figure out if a tax hurts some taxpayers more than others than yearly income, but annual income is a more common metric.

Reusing tax money also makes a big difference in how the tax is spread out. In general, a carbon tax with lump-sum rebates is very progressive compared to the current U.S. tax system, while a carbon tax with business tax cuts is regressive and a carbon tax with payroll tax cuts is about neutral. When the Tax Foundation modeled a strict carbon tax for payroll tax cut swap, we found that the bottom 90% of taxpayers would get small net tax cuts, while high-income families would pay more in taxes. When the Tax Policy Center analyzed a strict carbon tax for payroll tax swap, they found that lower-income households would pay slightly more in net taxes, middle- to upper-middle-income households would pay slightly less in net taxes, and high-income households would pay about the same in net taxes.[47] Some study shows that giving about 11% of the money made from a carbon tax to the bottom 20% of earners should cover all the costs.[48]

A frequent argument against the promises of a revenue-neutral carbon tax is that a pure tax swap that returns all revenue to taxpayers may work on paper, but it is inevitable that politicians will save revenue over time to pay for pet projects and grow the government.[49] In a similar way, some people say that adding a new tax, like a carbon tax, would lead to higher taxes in the long run, even if it started out by lowering other taxes. This is because a carbon tax would give the government an extra button to pull.[50]

Distribution and Revenue Recycling: In Practice

When modeling the distribution of carbon taxes that are already in place, the same question comes up as when modeling hypothetical carbon taxes: whether to use lifetime incomes or yearly incomes to measure distribution. Both choices have knowledge that is useful.

In the case of Sweden, one study found that the carbon tax was regressive when compared to yearly incomes but progressive when compared to lifetime incomes.[51] An study of British Columbia's carbon tax, on the other hand, found that the tax was slightly progressive even before revenue recycling was taken into account. This is because the tax is applied to the returns to labor and capital but not to taxpayers who depend on government transfer payments.[52]

People also use British Columbia as a good example of how to reuse money from a carbon tax. At first, the plan was almost textbook: most of the money would go toward lowering personal and business tax rates, and there would be a credit for low-income households to make up for the effect on distribution.[53] But since the tax was put in place, some of that shine has worn off.[54] The tax cuts for individuals and small businesses are still in place, but the company tax rate has gone back up from 10% to 12%.

It's hard to know exactly how government money is spent because it can be used for different things. A 2016 survey found that about 44% of the money from the carbon tax is used for revenue recycling, 28% for general government funds, and 15% for green spending that is set aside.[55] But there are a lot of problems with making such rough estimates, which suggests that the share of revenue used to cut or replace other taxes is much higher than 44%.

Sweden is a well-known example of how hard it can be to figure out where carbon tax money goes. When Sweden put a tax on carbon in 1991, it also changed its tax system in a big way to lower its once-infamously high individual tax rates. The reform lowered the business tax rate from 57% to 30% and lowered the highest personal tax rate from 80% to 50%.[56] It also set a tax rate of 30 percent on capital income and cut tax breaks for investing in capital, among other changes.

When tax rates are taken into account, it is clear that Sweden's tax change will have a long-term effect. In the 1970s and 1980s, Sweden was known for having very high tax rates at the top.[57] Individual and business tax rates have changed a little since Sweden's tax reform, but not nearly as much as they did before the reform. As of 2022, the top marginal tax rate on personal income has gone up from 50% to 52%, while the rate on corporations has gone down even more, to 20.6%.[58] Sweden has also cut taxes on capital in other ways since the change. For example, in the mid-2000s, they got rid of their wealth tax and their inheritance tax.[59]

Sweden was able to bring its other taxes closer to good tax principles with the extra money from the carbon tax, but the change did not make clear links between the money from the carbon tax and the money from lowering other taxes. Given that the carbon tax was just one part of a bigger plan to raise money, and that some of the other ways to raise money are bad for investment, it is hard to say exactly how the carbon tax affected other taxes or the economy as a whole.[60] Most of the time, though, the carbon tax came along with other tax cuts, and those tax cuts have held up well. The 2016 study put about half of Sweden's carbon tax money toward recycling, but if tax rates keep going down over the long term, that number could be much higher.

Ireland is another place that shows how hard it is to figure out how a carbon tax affects other taxes. In 2010, Ireland put in place a tax on carbon. On paper, none of the money was used to lower other taxes. A small amount was set aside for making private homes more energy efficient, and the rest went to general funds. In a 2016 study of how the money from the carbon tax was spent, the authors found that one-eighth of the money went to green subsidies and the rest went to general funds. None of the money was put toward recycling income.[61]

But the carbon tax was put in place because Ireland was facing a huge budget problem after the global financial crisis of 2008. The Irish government made a deal to get help from the European Central Bank, the European Commission, and the International Monetary Fund. In exchange, the Irish government agreed to raise taxes and cut spending. The carbon tax was one of these tax hikes. So, even though the money wasn't used to lower other taxes compared to what they were before, it did mean that other, more harmful taxes, like personal and business taxes, went up less as part of the deal.[62]

In 2010, the same thing happened in Iceland.[63] In that case, lawmakers put in place a carbon tax as a way to raise money, which kept other taxes from going up. There may not be a double dividend, where the income goes toward lowering other taxes, but there may be a double dividend compared to the alternative, where other taxes that would have been raised would have slowed growth more than the carbon tax.

Carbon taxes can be politically risky if the money from the taxes isn't used well. This has happened in both Australia and France. In Australia, the government spent a lot of the tax money on focused social programs, such as aid for certain parts of the economy and new subsidies for clean energy. However, the business tax environment did not change much.[64] Australia's carbon tax is one of the few carbon taxes that has been put in place and then taken away.

France put a tax on carbon in 2014, and at first, all the money went to spending on the environment and climate.[65] Later, the French government planned to raise both the carbon tax and the gas tax in order to fix the country's budget problems. These planned increases helped spark the well-known "Yellow Vest" protests.[66] France kept their carbon tax, but they stopped raising it.

Clearly, not all of the money from carbon taxes that have been put in place around the world has been used to lower other taxes. But income recycling isn't a promise made out of thin air either. There are many examples of carbon taxes being paired with long-term cuts in marginal tax rates or being used as an alternative to other tax increases when a tax increase of some kind was already going to happen.

Environmental Taxes

Environmental Taxes: In Theory

The gas tax is the most important tax for the environment in the U.S. It's not a tax to cut down on carbon pollution. Instead, it's a fee for using the roads. But it changes the prices of cars with no or low emissions, which gives a small boost to green technology.[67]

In a perfect world, the gas tax would be replaced by something like a vehicle miles traveled (VMT) tax, and then a carbon tax would be put in place. So, one policy is a dedicated user fee that applies to both electric and gas-powered cars, and the other policy is a small incentive to reduce carbon emissions. Because a VMT tax is hard to keep track of, it might be better for the U.S. to keep the gas tax and add a carbon tax on top of it. Since the current gas tax is not enough to cover all of the costs of roads, adding a carbon tax to it would not make driving more expensive.[68]

Aside from the gas tax, the U.S. has very few environmental taxes. In general, it would be better to get rid of these taxes and replace them with a broad carbon tax. Some of the other taxes on the environment are not aimed at the costs of carbon pollution. The excise tax on coal sales isn't meant to cover the costs of coal-fired power plants' pollution, but rather the costs of coal workers' black lung.[69] In a similar way, the Superfund tax on a number of chemicals is meant to reduce the costs to the local environment of possible leaks and spills.[70] On the one hand, it makes sense to have different taxes for different environmental costs. On the other hand, these environmental taxes don't bring in nearly enough money to cover the costs of running them.[71]

Environmental Taxes: In Practice

Unfortunately, Europe is not a good way to compare to the U.S. because fuel taxes in Europe are much higher than they are in the U.S. Under the Energy Tax Directive, countries in the European Union must tax fuel at least €0.33 per liter, which is about $1.33 per gallon. Most European countries add more taxes on top of this minimum rate.[72] In comparison, California has the highest gas taxes in the U.S., with an average tax rate of about $.67 per gallon. Even with the government gas tax of $0.184 per gallon, which brings the price up to $0.85 per gallon, it is still a lot less than the minimum tax in Europe.[73]

Other extra taxes in Europe can also cause problems with a carbon tax. Take the example of Sweden, where the carbon tax is mostly used to pay for the pollution caused by cars and trucks.[74] When Sweden put its carbon tax in place, it already had a tax on power use, a tax on airplanes, and a tax on cars that depends on how much pollution they put out. Even more, Sweden is part of the EU's Emissions Trading System, which mostly affects the manufacturing sector.[75] Some emissions are taxed by more than one of these, but the carbon tax only applies to a limited number of emissions. This is to try to avoid taxing the same emissions twice. The introduction of a carbon tax has not solved the problem of how to tax electricity.

In the end, carbon taxes in Europe have not replaced or streamlined the large networks of different taxes that serve similar but not equal goals. In the United States, putting in place a carbon tax would not pose the same risk, since energy goods in the U.S. are not subject to high excise taxes like they are in Europe.

In the United States, the few states that have passed their own "cap-and-trade" laws are the most important exception.[76] To keep a carbon tax completely neutral, policymakers would have to do one of two things: either get rid of state-level carbon pricing when a federal policy is put in place, or give companies a credit for the carbon price they paid at the state level.

Green Subsidies

Green Subsidies: In Theory

The goal of tax credits for green energy is the same as the goal of the carbon tax: to change the prices of high-emissions and low-emissions behaviors so that high-emissions behavior goes down and low-emissions behavior goes up. Most of the time, these handouts are less effective than a carbon tax for a number of reasons.

One reason is that green benefits need money, which is often raised through taxes that hurt the economy, while carbon taxes make it possible to lower taxes that hurt the economy.[77] But putting aside how much money is needed for green subsidies, it is harder to figure out the right base for a subsidy than for a tax.

The best place to show the problem might be in the power generation area. Imagine that an energy company is thinking about whether or not to improve or replace a coal power plant. The rule as it is now gives tax breaks to wind and solar power, but they might not work where the power plant is. If the energy company has to choose between upgrading its current coal plant or replacing it with a natural gas plant, tax breaks for wind and solar don't make the natural gas plant cheaper because it is better for the environment. On the other hand, the carbon tax would give the company a small reason to choose the natural gas plant over the coal plant.[78]

Assuming that the carbon tax is set at the socially optimal level, tax breaks for green investments in production are not needed and may even be harmful from the point of view of addressing the bad externalities caused by carbon emissions. One could argue that the government should keep helping green energy as part of a larger program of helping R&D investments all over the economy.[79] Instead of specific environmental policies, broad R&D policies might be a better way to help R&D.[80]

Also, some lawmakers shy away from carbon taxes because they worry about how the money would be shared. But green subsidies have the same problems. It is clear that the environmental points are a good idea. Severin Borenstein and Lucas Davis looked at IRS data and found that since 2006, more than 60 percent of the benefits of environmental tax credits have gone to the top 20 percent of earners, while only 10 percent have gone to the bottom 60 percent. Most of the benefits of tax credits for electric cars go to the top 20 percent of earners, which seems like a lot.[81] Tax credits from the newly passed Inflation Reduction Act could be looked at in a similar way at first.[82]

Green Subsidies: In Practice

It is easy to point out the problems with existing green subsidy systems, especially in the United States, and the benefits of changing the current set of green subsidies with a single carbon tax. Unfortunately, the European Union's wider use of carbon pricing hasn't stopped handouts from getting bigger and bigger. But if policymakers want to do something about climate change, they have to choose between carbon taxes and green handouts.

In 2018, the member states of the European Union spent €73 billion on subsidies for green energy and €15 billion on programs to save energy.[83] In 2018, the EU's GDP was around €13.5 trillion, which means that the EU spent about 0.7% of its GDP on support for the environment.[84] According to more recent figures from 2020, about 1% of the GDP of the EU area is spent on public investments in the environment.[85]

Compare that to the United States, where there is almost no price for carbon. In 2016, the U.S. spent $6.8 billion on subsidies for green energy and just under $1 billion on subsidies for energy efficiency. With a GDP of $19 trillion in 2016, this means that the U.S. spent 0.04 percent of its total income on environmental subsidies.[86] Even in the past, when green energy subsidies put in place during the Great Recession were still in place, the U.S. subsidies as a percentage of GDP were still lower than those in the EU. In 2010, the U.S. spent $23.2 billion, or 0.15 percent of GDP, on renewable energy subsidies and energy conservation. This came to $15.8 billion for renewable energy subsidies and $7.4 billion for energy conservation.[87] But because of the large tax credits for green energy in the Inflation Reduction Act, this ratio could change a lot in the future. This is especially true if the original estimates of how much these tax credits would cost were low.[88]

Even though Europe has generally had bigger green energy subsidies and a wider range of carbon pricing schemes than the U.S., that doesn't mean that carbon pricing schemes and green energy subsidies can't work together. European countries have been more concerned about climate change than the U.S., so it is not strange that they have had more subsidies and higher prices for carbon in the past.

The people who make EU policy think in terms of carbon goals. For example, the European Green Deal wants to cut carbon pollution by at least 55 percent by 2030 compared to what they were in 1990.[89] To reach this goal, the European Green Deal has a number of different policies, such as expanding the EU's Emissions Trading System and putting in place a carbon border adjustment mechanism (CBAM), as well as new regulations and subsidies to encourage Member States to use green technologies.[90] More recently, the EU Commission has come up with a plan for a "green industrial policy" to help green or green-like technologies even more.[91] If the European Green Deal didn't have a price for carbon, European politicians who care about the climate would have to spend more money on subsidies.

In the US, the Inflation Reduction Act has shown how carbon pricing and green funding can be used as direct political replacements. In 2010, Congress couldn't agree on a plan for cap and trade.[92] Since then, many green groups have moved away from carbon pricing in favor of more "transformative" ideas like the Green New Deal.[93] Politicians did the same thing: during the first two years of the Biden administration, the carbon tax idea was pushed aside in favor of the subsidy method, which led to the Inflation Reduction Act.[94]

In short, there aren't many cases where a carbon tax replaced subsidies for green energy that were already in place. However, the Inflation Reduction Act is a great example of a complicated support system that was put in place after carbon pricing was taken off the table.

Regulation

Regulation: In Theory

Most people think that the carbon tax, which sends a price signal, is a more cost-effective way to reduce carbon emissions than different types of top-down control.

The American Action Forum said that the cost of reducing carbon pollution by one ton with Obama-era rules was twice as much as it would have been with a carbon tax of $25 per ton.[95] When you think about the possible benefits of recycling tax money in the case of the carbon tax, the difference between the two approaches gets even bigger. The reason why pricing carbon is better than control is because of how they deal with different emissions. The carbon tax lets each polluter weigh the cost of reducing emissions against the tax due, while regulations punish polluters even when the cost of reducing emissions is higher than the cost of emissions.[96]

These studies compare and contrast carbon regulations that are pretty well made with a carbon tax. But some rules have been ineffective because of how they were made. For example, Corporate Average Fuel Economy (CAFE) guidelines control how much gas an automobile uses based on its size, with lighter trucks having less strict rules than passenger cars. Because of this difference, manufacturers are more likely to make bigger cars so they can meet the looser rules. This makes it harder to cut emissions.[97]

Also, like green subsidies, environmental laws have problems with how they are distributed.[98]

Regulation: In Practice

Like subsidies, it is less likely that carbon taxes will replace current environmental regulations. Instead, they are more likely to be used to pay for new climate regulations that go beyond what is already in place.

With the European Green Deal, rules are getting stricter and the price of carbon is going up. In the plan, there are changes to the EU's Emissions Trading System and more rules about emissions in many parts of the economy. It improves emissions standards for cars and vans and sets new limits on pollution from maritime fuel, among other top-down policies. It also changes the EU's directive on renewable fuels in the power sector.[99] Sweden is one of the Member States that has its own carbon tax. Along with its carbon tax, Sweden also has a full set of rules about pollution and the climate.[100]

One problem with figuring out the trade-offs between environmental regulations and carbon taxes is that many environmental laws are meant to protect against harms that aren't caused by climate change and are often limited to a certain area. For example, the Clean Air Act of 1970 was meant to protect against local effects of air pollution, not global climate change. Climate change didn't become a big political issue until the 1980s. The year 1988 was a big turning point.[101] Finland is one of the few places where carbon taxes have replaced some current environmental rules.[102]

Energy market deregulation is a big area of deregulation that is related to carbon taxes in a roundabout way. In the United States, energy market deregulation moved power production, transmission, and distribution away from regulated monopolies with set prices and toward competitive markets with multiple firms and more variable prices.[103] In the European Union, deregulation of the energy market followed the same loose structure, but more privatization attempts were made.[104] Even though the overall costs and benefits of deregulating the energy market are up for debate[105], there is some proof that deregulating the energy market has made the environmental benefits of carbon pricing schemes happen faster.[106]

External Validity and Conclusions

The theory case for a carbon tax is strong, but critics say that when carbon taxes are put into place, the benefits don't show up. Even though current carbon taxes may not be as good as the ideal carbon tax, they still keep many of their promises. For example, they reduce emissions at a relatively low cost to the economy, and a large portion (likely most) of the money they bring in goes back to taxpayers or pays for other tax increases. Critics are right that the carbon taxes that are already in place have not been able to replace all of the other complicated environmental and climate policies.

From what has happened in other countries, we can see that some carbon taxes have been paired with long-term cuts in other taxes, but few have been paired with the removal of important environmental laws. The future of a carbon tax in the United States is up to lawmakers, who should look at both theoretical and real-world examples to learn how to make the best system for a carbon tax.

[1] “Economists’ Statement on Carbon Dividends,” The Wall Street Journal, Jan. 16, 2019, https://www.wsj.com/articles/economists-statement-on-carbon-dividends-11547682910.
[2] The difference between carbon taxes and cap and trade is whether price or quantity is set by the market. Under a carbon tax, government sets a price on carbon emissions, and companies can choose how much to reduce their emissions in response (in other words, allowing the market to choose the quantity). Under a cap-and-trade system, government sets a cap on the permissible amount of carbon emissions and auctions off allowances for pollution, effectively allowing the market to choose the price.
[3] World Bank, “Carbon Pricing Dashboard,” last updated Apr. 1, 2022, https://carbonpricingdashboard.worldbank.org/map_data.
[4] James R. McFarland, Allen A. Fawcett, Adele C. Morris, John M. Reilly, and Peter J. Wilcoxen, “Overview of the EMF 32 Study on U.S. Carbon Tax Scenarios,” Climate Change Economics 9:1 (2018), https://www.worldscientific.com/doi/suppl/10.1142/S201000781840002X; see also Alexander R. Barron, Allen A. Fawcett, Marc A. Hafstead, James R. McFarland, and Adele C. Morris, “Policy Insights from the EMF 32 Study on U.S. Carbon Tax Scenarios,” Climate Change Economics 9:1 (2018), https://www.worldscientific.com/doi/10.1142/S2010007818400031.
[5] David Popp, “Induced Innovation and Energy Prices,” American Economic Review 92:1 (March 2002), https://www.aeaweb.org/articles?id=10.1257/000282802760015658.
[6] Stephie Fried, “Climate Policy and Innovation: A Quantitative Macroeconomic Analysis,” American Economic Journal: Macroeconomics 10:1 (2018), https://pubs.aeaweb.org/doi/pdfplus/10.1257/mac.20150289.
[7] See, for instance, Alex Muresianu and Sean Bray, “Carbon Taxes, Trade, and American Competitiveness,” Tax Foundation, Nov. 3, 2022, https://taxfoundation.org/border-adjusted-carbon-tax-revenue/.
[8] Joshua Meltzer, “A Carbon Tax As a Driver of Green Technology Innovation and the Implications for International Trade,” Energy Law Journal 35:45 (2014), https://www.eba-net.org/wp-content/uploads/2023/02/4-14-45-Meltzer_Final-5.13.14.pdf; see also Aaron Cosbey, Susanne Droege, Carolyn Fischer, and Clayton Munnings, “Developing Guidance for Implementing Border Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature,” Review of Environmental Economics and Policy 13:1 (Winter 2019), https://www.journals.uchicago.edu/doi/full/10.1093/reep/rey020.
[9] World Bank, “GDP (current US$),” World Bank National Accounts Data, and OECD National Accounts data files, accessed Feb. 28, 2023, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD; see also World Bank, “Carbon Pricing Dashboard,” last updated Apr. 1, 2022, https://carbonpricingdashboard.worldbank.org/. These criteria were chosen to exclude carbon taxes with little external validity for a U.S. policy conversation. For example, Estonia’s carbon tax only covers 5.6 percent of its emissions; Poland and Ukraine have effective carbon tax rates around or below $1 per ton; and a microstate like Lichtenstein provides few policy lessons for the United States.
[10] This excludes the many carbon taxes that have been introduced in the past 10 years, in countries like France, Spain, Portugal, Mexico, Chile, and Canada (at a national level), as well as carbon taxes that were introduced but then quickly repealed, such as Australia’s.
[11] This excludes both countries like Estonia, Latvia, and Poland, which all have carbon taxes that cover less than 10 percent of emissions, as well as countries like Japan and Ukraine, which have broad carbon taxes set at low rates.
[12] This excludes countries like Liechtenstein, Iceland, and Slovenia.
[13] Samuel Jonsson, Anders Ydstedt, and Elke Asen, “Looking Back on 30 Years of Carbon Taxes in Sweden,” Tax Foundation, Sep. 23, 2020, https://taxfoundation.org/sweden-carbon-tax-revenue-greenhouse-gas-emissions/.
[14] Samuel Jonsson, Anders Ydstedt, and Elke Asen, “Looking Back on 30 Years of Carbon Taxes in Sweden.”
[15] Ibid.
[16] Hannah Ritchie and Max Roser, “Electricity Production by Source, Sweden,” Our World in Data, accessed Mar. 24, 2023, https://ourworldindata.org/energy/country/sweden#what-sources-does-the-country-get-its-energy-from.
[17] Hannah Ritchie, Max Roser, and Pablo Rosado “CO2 and Greenhouse Gas Emissions,” Our World in Data, accessed Feb. 28, 2023, https://ourworldindata.org/co2/country/sweden.
[18] Julius J. Andersson, “Carbon Taxes and CO2 Emissions: Sweden as a Case Study,” Economic Policy 11:4 (2019), https://pubs.aeaweb.org/doi/pdfplus/10.1257/pol.20170144.
[19] Brian Murray and Nicholas Rivers, “British Columbia’s Revenue-Neutral Carbon Tax: A Review of the Latest Grand Experiment in Environmental Policy,” Energy Policy 86 (November 2015), https://www.sciencedirect.com/science/article/abs/pii/S0301421515300550.
[20] Younes Ahmadi, Akio Yamazaki, and Philippe Kabore, “How Do Carbon Taxes Affect Emissions? Plant-Level Evidence from Manufacturing,” Environmental and Resource Economics 82 (2022), https://link.springer.com/article/10.1007/s10640-022-00678-x; see also Chad Lawley and Vincent Thivierge, “Refining the Evidence: British Columbia’s Carbon Tax and Household Gasoline Consumption,” The Energy Journal 39:2 (November 2016), https://www.iaee.org/en/publications/init2.aspx?id=0; Jean-Thomas Barnard and Maral Kichian, “The Long and Short Run Effects of British Columbia’s Carbon Tax on Diesel Demand,” Energy Policy 131 (August 2019), https://www.sciencedirect.com/science/article/abs/pii/S0301421519302708.
[21] See British Columbia, “Provincial Inventory of Greenhouse Gas Emissions,” Ministry of Environment and Climate Change Strategy (September 2022), https://www2.gov.bc.ca/gov/content/environment/climate-change/data/provincial-inventory, see also John Nyboer and Maximilian Kniewasser, “Energy and GHG Emissions in British Columbia, 1990-2010,” Canadian Industrial End-use Data and Analysis Centre (June 2012), https://pics.uvic.ca/sites/default/files/uploads/publications/Energy_Data_Report_2010_1.pdf.
[22] Jan Abrell, Miriam Kosch, and Sebastian Rausch, “How Effective Was the U.K. Carbon Tax? A Machine Learning Approach to Policy Evaluation,” USAEE Working Paper No. 19-396, Apr. 17, 2019 https://www.econstor.eu/bitstream/10419/207139/1/1663457328.pdf.
[23] Marion Leroutier, “Carbon Pricing and Power Sector Decarbonization: Evidence from the UK,” Journal of Environmental Economics and Management 111 (January 2022), https://www.sciencedirect.com/science/article/pii/S0095069621001285.
[24] Hannah Ritchie and Max Roser, “United Kingdom: Energy Country Profile,” Our World in Data, accessed Mar. 8, 2023, https://ourworldindata.org/energy/country/united-kingdom.
[25] Hannah Ritchie and Max Roser, “United States: CO2 Country Profile,” Our World in Data, accessed Apr. 4, 2023, https://ourworldindata.org/energy/country/united-states.
[26] Kristin Hayes and Marc Hafstead, “Carbon Pricing 103: Effects Across Sectors,” Resources for the Future, Apr. 27, 2020, https://www.rff.org/publications/explainers/carbon-pricing-103-effects-across-sectors/.
[27] Tax Foundation, “Option 50: Institute a Carbon Tax” in Options for Reforming America’s Tax Code 2.0, Apr. 19, 2021, https://taxfoundation.org/tax-reform-options/?option=50.
[28] See for instance, Asa Johansson, Christopher Heady, Jens Matthias Arnold, Bert Brys, and Laura Vartia, “Taxation and Economic Growth,” OECD Economics Department Working Papers No. 620 (July 2008), https://www.oecd-ilibrary.org/economics/taxation-and-economic-growth_241216205486.
[29] Kyle Pomerleau and Elke Asen, “Carbon Taxes and Revenue Recycling: Revenue, Economic, and Distributional Implications,” Tax Foundation, Nov. 6, 2019, https://taxfoundation.org/carbon-tax/.
[30] Robert P. Murphy, “Carbon Taxes and the ‘Tax Interaction Effect,’” Econlib, Oct. 1, 2012, https://www.econlib.org/library/Columns/y2012/Murphycarbon.html.
[31] A. Lans Bovenberg and Lawrence H. Goulder, “Optimal Environmental Taxation in the Presence of Other Taxes: General Equilibrium Analysis,” The American Economic Review 86:4 (September 1996), https://www.jstor.org/stable/2118315.
[32] Jaume Freire-Gonzalez, “Environmental Taxation and the Double Dividend Hypothesis in CGE Modelling Literature: A Critical Review,” Journal of Policy Modeling 40:1 (January-February 2018), https://www.sciencedirect.com/science/article/pii/S0161893817301205?via%3Dihub; see also Lawrence H. Goulder and Marc A. Hafstead, “Tax Reform and Environmental Policy: Options for Recycling Revenue from a Tax on Carbon Dioxide,” Resources for the Future, Discussion Paper 13-31 (October 2013), https://media.rff.org/documents/RFF-DP-13-31.pdf.
[33] Kyle Pomerleau and Elke Asen, “Carbon Taxes and Revenue Recycling: Revenue, Economic, and Distributional Implications.”
[34] Alex Muresianu and Huaqun Li, “Carbon Taxes and the Future of Green Tax Reform,” Tax Foundation, Jun. 21, 2022, https://taxfoundation.org/carbon-taxes-green-tax-reforms/.
[35] Gilbert Metcalf and James Stock, “Measuring the Macroeconomic Impact of Carbon Taxes,” AEA Papers and Proceedings 110 (May 2020), https://www.aeaweb.org/articles?id=10.1257/pandp.20201081.
[36] Brian Murray and Nicholas Rivers, “British Columbia’s Revenue-Neutral Carbon Tax: A Review of the Latest Grand Experiment in Environmental Policy”; see also Gilbert E. Metcalf, “On the Economics of a Carbon Tax for the United States,” Brookings Institution, March 2019, https://www.brookings.edu/wp-content/uploads/2019/03/metcalf_web.pdf.
[37] Akio Yamazaki, “Jobs and Climate Policy: Evidence from British Columbia’s Revenue-Neutral Carbon Tax,” Journal of Environmental Economics and Management 83 (May 2017), https://www.sciencedirect.com/science/article/abs/pii/S0095069617301870; see also Younes Ahmadi, Akio Yamazaki, and Philippe Kabore, “How Do Carbon Taxes Affect Emissions? Plant-Level Evidence from Manufacturing.”
[38] Alex Robson, “Australia’s Carbon Tax: An Economic Evaluation,” Institute for Energy Research, September 2013, https://www.instituteforenergyresearch.org/wp-content/uploads/2013/09/IER_AustraliaCarbonTaxStudy.pdf.
[39] Malcolm Fairbropther and Ekaterina Rhodes, “Climate Policy in British Columbia: An Unexpected Journey,” Frontiers in Climate 4 (2022), https://www.frontiersin.org/articles/10.3389/fclim.2022.1043672/full.
[40] Brian Murray and Nicholas Rivers, “British Columbia’s Revenue-Neutral Carbon Tax: A Review of the Latest Grand Experiment in Environmental Policy.”
[41] Jeremy Carl and David Fedor, “Tracking Global Carbon Revenues: A Survey of Carbon Taxes Versus Cap-and-Trade in the Real World,” Energy Policy 96 (September 2016), https://www.sciencedirect.com/science/article/pii/S0301421516302531.
[42] Malcolm Fairbropther and Ekaterina Rhodes, “Climate Policy in British Columbia: An Unexpected Journey.”
[43] Alex Robson, “Australia’s Carbon Tax: An Economic Evaluation.”
[44] John Horowitz, Julie-Anne Cronin, Hannah Hawkins, Laura Konda, and Alex Yuskavage, “Methodology for Analyzing a Carbon Tax,” Office of Tax Analysis Working Paper 115, January 2017, https://home.treasury.gov/system/files/131/WP-115.pdf.
[45] See for instance, Climate Leadership Council, “The Four Pillars of the Carbon Dividends Program,” https://clcouncil.org/our-solution/.
[46] Kevin A. Hassett, Aparna Mathur, and Gilbert E. Metcalf, “The Lifetime of a U.S. Carbon Tax: A Lifetime and Regional Analysis,” The Energy Journal 30:2 (2009), https://www.jstor.org/stable/41323238; see also Aparna Mathur and Adele C. Morris, “Distributional Effects of a Carbon Tax in Broader U.S. Fiscal Reform,” The Brookings Institution, Dec. 14, 2012, https://www.brookings.edu/wp-content/uploads/2016/06/14-carbon-tax-fiscal-reform-morris.pdf.
[47] Kyle Pomerleau and Elke Asen, “Carbon Taxes and Revenue Recycling: Revenue, Economic, and Distributional Implications”; see also Joseph Rosenberg, Eric Toder, and Chenxi Lu, “Distributional Implications of a Carbon Tax,” Tax Policy Center, July 2018, https://www.taxpolicycenter.org/sites/default/files/publication/155473/distributional_implications_of_a_carbon_tax_5.pdf.
[48] Mathur and Morris, “Distributional Effects of a Carbon Tax in Broader U.S. Fiscal Reform.”
[49] Jordan McGillis, “The Case Against a Carbon Tax,” Institute for Energy Research, April 2019, https://www.instituteforenergyresearch.org/wp-content/uploads/2019/04/Carbon-Tax-Policy-BriefFinalText-1.pdf, see also David Kreutzer and Nicolas Loris, “Carbon Tax Would Raise Unemployment, Not Swap Revenue,” The Heritage Foundation, Jan. 8, 2013, https://www.heritage.org/environment/report/carbon-tax-would-raise-unemployment-not-swap-revenue.
[50] Chris Prandoni, “Americans for Tax Reform Opposes a Carbon Tax,” Americans for Tax Reform, Nov. 13, 2012, https://www.atr.org/americans-tax-reform-opposes-carbon-a7346/.
[51] Julius Andersson and Giles Atkinson, “The Distributional Effects of a Carbon Tax on Gasoline: The Role of Income Inequality,” Stockholm Institute of Transition Economics Working Paper (February 2022), https://www.juliusandersson.com/The_Distributional_Effects_of_a_Carbon_Tax_February_2022.pdf.
[52] Marisa Beck, Nicholas Rivers, Randall Wigle, and Hidemichi Yonezawa, “Carbon Tax and Revenue Recycling: Impacts on Households in British Columbia,” Resource and Energy Economics 41 (August 2015), https://www.sciencedirect.com/science/article/abs/pii/S0928765515000317.
[53] Brian Murray and Nicholas Rivers, “British Columbia’s Revenue-Neutral Carbon Tax: A Review of the Latest Grand Experiment in Environmental Policy.”
[54] Charles Lammam and Taylor Jackson, “Examining the Revenue Neutrality of British Columbia’s Carbon Tax,” Fraser Institute, Feb. 1, 2017, https://www.fraserinstitute.org/sites/default/files/examining-the-revenue-neutrality-of-bcs-carbon-tax.pdf.
[55] Jeremy Carl and David Fedor, “Tracking Global Carbon Revenues: A Survey of Carbon Taxes Versus Cap-and-Trade in the Real World.” Categories do not sum to 100 percent as these categories are not comprehensive, and in some years, revenue from carbon taxes may not exactly match revenue recycling uses.
[56] Samuel Jonsson, Anders Ydstedt, and Elke Asen, “Looking Back on 30 Years of Carbon Taxes in Sweden.”
[57] Daniel J. Mitchell, “ABBA and the Most-Inane-Ever Tax Controversy,” Cato Institute, Feb. 18, 2014, https://www.cato.org/blog/abba-story-most-inane-ever-tax-controversy.
[58] Cristina Enache, “Corporate Tax Rates Around the World, 2022,” Tax Foundation, Dec. 13, 2022, https://taxfoundation.org/publications/corporate-tax-rates-around-the-world/; see also PwC, “Sweden: Individual – Taxes on Personal Income,” last reviewed Jan. 30, 2023, https://taxsummaries.pwc.com/sweden/individual/taxes-on-personal-income.
[59] Samuel Jonsson, Anders Ydstedt, and Elke Asen, “Looking Back on 30 Years of Carbon Taxes in Sweden.”
[60] Ibid; see also Alan J. Auerbach, Kevin Hassett, and Jan Sodersten, “Taxation and Corporate Investment: the Impact of the 1991 Swedish Tax Reform,” Swedish Economic Policy Review 2 (1995), https://web.archive.org/web/20200709190922id_/https://www.regeringen.se/contentassets/da1b0124255849ddaa1b2c9c9ad7c14f/alan-j.-auerbach-kevin-hassett–jan-sodersten-taxation-and-corporate-investment-the-impact-of-the-1991-swedish-tax-reform.
[61] Jeremy Carl and David Fedor, “Tracking Global Carbon Revenues: A Survey of Carbon Taxes Versus Cap-and-Trade in the Real World.”
[62] Frank Convery, Louise Dunne, and Deirdre Joyce, “Ireland’s Carbon Tax and the Fiscal Crisis: Issues in Fiscal Adjustment, Environmental Effectiveness, Competitiveness, Leakage, and Equity Concerns,” OECD Environmental Working Papers 59 (October 2013), https://www.oecd-ilibrary.org/environment-and-sustainable-development/ireland-s-carbon-tax-and-the-fiscal-crisis_5k3z11j3w0bw-en.
[63] Jeremy Carl and David Fedor, “Tracking Global Carbon Revenues: A Survey of Carbon Taxes Versus Cap-and-Trade in the Real World.”
[64] Alex Robson, “Australia’s Carbon Tax: An Economic Evaluation.”
[65] Jeremy Carl and David Fedor, “Tracking Global Carbon Revenues: A Survey of Carbon Taxes Versus Cap-and-Trade in the Real World.”
[66] Patrick Criqui, Mark Jaccard, and Thomas Sterner, “Carbon Taxation: A Tale of Three Countries,” Sustainability 11:22 (2019), https://www.mdpi.com/2071-1050/11/22/6280.
[67] Ulrik Boesen, “Who Will Pay for the Roads,” Tax Foundation, Aug. 25, 2020, https://taxfoundation.org/road-funding-vehicle-miles-traveled-tax.
[68] Ibid., see also Joseph Kile, “Testimony: Options for Funding and Financing Highway Spending,” Congressional Budget Office, May 18, 2021, https://www.cbo.gov/publication/57222; Ulrik Boesen, “How Are Your State’s Roads Funded,” Tax Foundation, Apr. 21, 2021, https://taxfoundation.org/state-infrastructure-spending/.
[69] Scott D. Szymendera, “The Black Lung Program, the Black Lung Disability Trust Fund, and the Excise Tax on Coal,” Congressional Research Service, Feb. 7, 2023, https://crsreports.congress.gov/product/pdf/R/R45261.
[70] Thomas A. Barthold, “Issues in the Design of Environmental Taxes,” Journal of Economic Perspectives 8:1 (Winter 1994), https://pubs.aeaweb.org/doi/pdf/10.1257/jep.8.1.133.
[71] Ibid; see also Don Fullerton, “Why Have Separate Environmental Taxes” in Tax Policy and the Economy 10 (January 1996), https://www.nber.org/system/files/chapters/c10898/c10898.pdf.
[72] Adam Hoffer, “Gas Taxes in Europe, 2022,” Tax Foundation, Jul. 12, 2022, https://taxfoundation.org/gas-taxes-in-europe-2022/.
[73] Janelle Fritts, “How High are Gas Taxes in Your State,” Tax Foundation, Jul. 28, 2021, https://taxfoundation.org/state-gas-tax-rates-2021/.
[74] Julius J. Andersson, “Carbon Taxes and CO2 Emissions: Sweden as a Case Study.”
[75] Samuel Jonsson, Anders Ydstedt, and Elke Asen, “Looking Back on 30 Years of Carbon Taxes in Sweden.” Notably, the EU hopes to expand the existing ETS to cover emissions from more sectors in the coming years.
[76] Gilbert Metcalf, “Implementing a Carbon Tax,” Resources for the Future, May 2017, https://media.rff.org/documents/RFF-Rpt-Metcalf_carbontax.pdf.
[77] Charles L. Ballard and Steven G. Medema, “The Marginal Efficiency Effects of Tax and Subsidies in the Presence of Externalities,” Journal of Public Economics 52 (1993), http://econ.msu.edu/faculty/ballard/docs/Marginal%20Efficiency%20Effects%20of%20Taxes%20and%20Subsidies,%20Journal%20of%20Public%20Economics%201993.pdf.
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[81] Severin Borenstein and Lucas W. Davis, “The Distributional Effects of U.S. Clean Energy Tax Credits,” Tax Policy and the Economy 30:1 (2016), https://www.journals.uchicago.edu/doi/full/10.1086/685597.
[82] John Bistline, Neil R. Mehrotra, and Catherine Wolfram, “Economic Implications of the Climate Provisions of the Inflation Reduction Act,” Brookings Papers on Economic Activity BPEA Conference Draft, Mar. 30-31, 2023, https://www.brookings.edu/wp-content/uploads/2023/03/BPEA_Spring2023_Bistline-et-al_unembargoedUpdated.pdf; see also William McBride and Daniel Bunn, “Repealing Inflation Reduction Act’s Green Energy Credits Would Raise $570 Billion, JCT Projects,” Tax Foundation, Apr. 26, 2023, https://taxfoundation.org/inflation-reduction-act-green-energy-tax-credits-analysis/.
[83] Directorate-General for Energy, “Energy Costs, Taxes, and the Impact of Government Interventions on Investment,” European Commission, Oct. 23, 2020, https://op.europa.eu/en/publication-detail/-/publication/76c57f2f-174c-11eb-b57e-01aa75ed71a1/language-en.
[84] Statista, “Gross Domestic Product of the European Union (EU27) from 1995 to 2021,” Statista Research Department, Feb. 28. 2023, https://www.statista.com/statistics/279447/gross-domestic-product-gdp-in-the-european-union-eu/.
[85] Mar Delgado-Tellez, Marien Ferdinandusse, and Carolin Nerlich, “Fiscal Policies to Mitigate Climate Change in the Euro Area,” European Central Bank Economic Bulletin, 2022, https://www.ecb.europa.eu/pub/economic-bulletin/articles/2022/html/ecb.ebart202206_01~8324008da7.en.html.
[86] EIA, “Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2016,” U.S. Energy Information Administration, April 2018, https://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf.
[87] Ibid.
[88] William McBride and Daniel Bunn, “Repealing Inflation Reduction Act’s Green Energy Credits Would Raise $570 Billion, JCT Projects.”
[89] EU Commission, “European Green Deal,” accessed Mar. 23, 2023, https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en.
[90] Ibid, see also Robert C. Pietzcker, Sebastian Osorio, and Renato Rodrigues, “Tightening EU ETS Targets in Line with the European Green Deal: Impacts on the Decarbonization of the EU Power Sector,” Applied Energy 293 (July 2021), https://www.sciencedirect.com/science/article/pii/S0306261921003962.
[91] EU Commission, “A Green Deal Industrial Plan for the Net-Zero Age,” Feb. 1, 2023, https://commission.europa.eu/system/files/2023-02/COM_2023_62_2_EN_ACT_A%20Green%20Deal%20Industrial%20Plan%20for%20the%20Net-Zero%20Age.pdf.
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[93] Zack Colman and Eric Wolff, “Why Greens Are Turning Away From a Carbon Tax,” Politico, Dec. 9, 2018, https://www.politico.com/story/2018/12/09/carbon-tax-climate-change-environmentalists-1052210.
[94] Amy Harder, “Joe Biden Unlikely to Push Carbon Tax as Part of Climate Change Plan,” Axios, Aug. 20, 2020, https://www.axios.com/2020/08/20/joe-biden-carbon-tax-climate-change-plan.
[95] Phillip Rossetti, Dan Bosch, and Dan Goldbeck, “Comparing Effectiveness of Climate Regulations and a Carbon Tax,” American Action Forum, Jul. 2, 2018, https://www.americanactionforum.org/research/comparing-effectiveness-climate-regulations-carbon-tax-123/.
[96] Shuting Pomerleau and Ed Dolan, “Carbon Pricing and Regulations Compared: An Economic Explainer,” Niskanen Center, September 2021, https://www.niskanencenter.org/wp-content/uploads/2021/09/Niskanen2-2.pdf.
[97] Kate A. Whitefoot and Steven J. Skerlos, “Design Incentives to Increase Vehicle Size Created From the U.S. Footprint-Based Fuel Economy Standards,” Energy Policy (2011), https://www.meche.engineering.cmu.edu/_files/images/research-groups/whitefoot-group/WS-FootprintFuelEconomy-EP.pdf.
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[99] EU Commission, “‘Fit for 55’: Delivering the EU’s 2030 Climate Target on the Way to Climate Neutrality,” Jul. 14, 2021, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021DC0550&from=EN.
[100] Swedish Ministry of Infrastructure, “Sweden’s Integrated National Energy and Climate Plan,” Jan. 16, 2020, https://energy.ec.europa.eu/system/files/2020-03/se_final_necp_main_en_0.pdf.
[101] Robinson Meyer, “History’s Greatest Obstacle to Climate Progress Has Finally Fallen,” The Atlantic, Aug. 7, 2022, https://www.theatlantic.com/science/archive/2022/08/senate-climate-inflation-reduction-bill-passed/671073/.
[102] Rauno Sairinen, “Regulatory Reform and Development of Environmental Taxation: The Case of Carbon Taxation and Ecological Tax Reform in Finland” in Handbook of Research on Environmental Taxation, ed. Janet E. Milne and Mikael Skou Andersen, https://books.google.com/books?id=1ouS7zPW9T0C&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false.
[103] W.M. Warwick, “A Primer on Electric Utilities, Deregulation, and Restructuring of Energy Markets,” prepared for U.S. Department of Energy (May 2002), https://www.pnnl.gov/main/publications/external/technical_reports/PNNL-13906.pdf.
[104] Tooraj Jamasb and Michael Pollitt, “Electricity Market Reform in the European Union: Review of Progress toward Liberalization and Integration,” The Energy Journal 26 (2005), https://www.jstor.org/stable/23297005.
[105] See for instance, Ivan Penn, “Why Are Energy Prices So High? Some Experts Blame Deregulation,” The New York Times, Jan. 4, 2023, https://www.nytimes.com/2023/01/04/business/energy-environment/electricity-deregulation-energy-markets.html; Lucas W. Davis and Catherine Wolfram, “Deregulation, Consolidation, and Efficiency: Evidence from U.S. Nuclear Power,” Applied Economics 4:4 (October 2012), https://www.aeaweb.org/articles?id=10.1257/app.4.4.194; Stephen Duah Agyeman and Boqiang Lin, “Electric Industry (de)regulation and Innovation in Negative-Emission Technologies: How do Market Liberalization Influences Climate Change Mitigation,” Energy 270 (May 2023), https://www.sciencedirect.com/science/article/abs/pii/S0360544223002578.
[106] Derek E.H. Olmstead and Adonis Yatchew, “Carbon Pricing and Alberta’s Energy-Only Electricity Market,” The Electricity Journal 35:4 (May 2022), https://www.sciencedirect.com/science/article/pii/S1040619022000380.