Many stakeholders have called for the United States to adopt a carbon tax. Such a tax could raise billions of dollars in annual revenue while simultaneously reducing greenhouse gas emissions. Several carbon tax proposals were introduced in the last Congress (2019-2020 term), and it is likely that several more will be introduced in the new Congress. Several conservative economists have endorsed the idea, as has Janet Yellen, President Biden’s Secretary of the Treasury. But the details of a carbon tax matter—for revenue generation, emissions reductions and fairness. Because Congress is likely to consider several competing carbon tax proposals this year, this article provides a way to compare proposals with a checklist of 10 questions to ask about any specific legislative carbon tax proposal, to help understand that proposal’s design and implications.

1. What form does the tax take: Is it an emissions tax, a fuel tax or a production tax?

The point of a carbon tax is to reduce greenhouse gas emissions by imposing a price on those emissions. But there is more than one way to impose that price. Critically, the range of options depends, to a very large degree, on the type of greenhouse gas the tax is trying to address.

The most ubiquitous greenhouse gas is carbon dioxide (CO2) and the largest source of CO2 emissions is the combustion of fossil fuels. Those emissions can be addressed by imposing a fee on each individual emission source or by taxing the carbon content of the fuel—because carbon content is a reliable predictor of CO2 emissions across different combustion circumstances. Most carbon tax proposals are fuel tax proposals; they impose a tax on fuel sales, corresponding to the amount of CO2 that will be emitted when the fuel is burned.

For CO2 emissions, the fuel tax approach has one significant advantage over the emissions fee approach. The fuel tax can be imposed “upstream,” rather than “downstream,” thereby reducing the total number of taxpayers and the overall administrative burdens associated with collecting the tax. A tax imposed on petroleum products as they leave the refinery, for example, is a way to address CO2 emissions from motor vehicles without the need to tax every individual owner of a gasoline-powered car. Most CO2-related carbon tax proposals work that way—they are upstream fuel taxes rather than downstream emissions taxes.

But not all greenhouse gas emissions can be addressed through a fuel tax, because not all greenhouse gas emissions come from fossil fuel combustion. Methane, for example, is released in significant quantities from cows, coal mines and natural gas production systems. A carbon tax directed at those emissions is likely to take the form of an emissions fee imposed on the owner or operator of the emission source. Many carbon tax proposals, however, simply ignore methane emissions or expressly exempt agricultural sources.

Fluorinated gases are yet another type of greenhouse. If they are subjected to a carbon tax, that tax is likely to take the form of a production tax, which would be imposed [...]

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