The Center on Global Energy Policy is pursuing a Carbon Tax Research Initiative to explore key questions and implications related to the design and implementation of a carbon tax in the United States. Over the course of 2018 and beyond, the Carbon Tax Research Initiative will provide a platform to educate and enhance the dialogue among policymakers, business leaders, students, and the general public through original research, public events, and workshops.

Climate change presents serious threats to the economy, the environment and national security. To address these threats, a growing number of influential businesses, scientists, NGOs, policymakers, and thought leaders are calling for a carbon tax, which would put a price on carbon dioxide (CO2) and other greenhouse gas (GHG) emissions. Economists point to a price on GHGs as a key part of a strategy to address climate risks cost-effectively. While a carbon tax is not the only way to price carbon, it is the form currently attracting the most attention at the U.S. federal level, and thus is the focus of CGEP’s effort.

While the prospects for a carbon tax may seem unlikely today, given the speed at which legislative windows open and close, comprehensive policy analysis needs to be prepared in advance. That way, when the time comes, policymakers will have the tools necessary to make informed decisions on whether and how to implement a carbon tax policy in the United States.  

The purpose of CGEP's Carbon Tax Research Initiative is not to advocate for a particular policy, but rather to produce clear, objective, and data-driven research that enables the thoughtful consideration of federal carbon tax policy in the United States. CGEP’s research will address the important decisions associated with the design of a carbon tax policy and the implications of these decisions on the U.S. energy system, environment, and economy.

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In the first report of the series, authors Jason Bordoff, Director of the Center on Global Energy Policy, and John Larsen, Director at the Rhodium Group, outline important design considerations of a carbon tax, forming the basis for subsequent research. These design elements include:

Scope and Emissions Coverage: Which sectors and which gases are taxed, and what amount of total US greenhouse gas (GHG) emissions would be covered by a tax?

Point of Taxation: Where are carbon emissions taxed: upstream, downstream, or somewhere in between? Policymakers must weigh the desired scope of the tax, existing emissions and/or fuel reporting infrastructure, administrative efficiency, and politics in determining where to tax.

Tax Rates: What should be the initial tax rate and to what extent should the tax increase over time? Should the tax be set to achieve an emissions target, a revenue target, or to reflect the societal costs of greenhouse gas emissions?   

Revenue Allocation Options: What should the government do with revenues collected through a carbon tax? Six alternatives are explored, each with different implications for macroeconomic outcomes and the distribution of costs and benefits. 

Addressing Effects on U.S. Competitiveness and Vulnerable Populations: Increasing energy prices will have adverse effects on consumers and the competitiveness of certain energy-intensive industries, and certain regions and communities are highly dependent on fossil fuel industries.  How can policymakers design a carbon tax to protect vulnerable households, industries, and communities?

Interaction between Carbon Taxes and Other Energy/Environmental Policies: The design of a carbon tax should account for interactions with existing federal and state policies, including regulations, technology R&D, and subsidies for clean energy as well as federal royalty, bonus, lease, and tax revenue from fossil fuel production.