Just Taxes Blog by ITEP

A Well-Designed Carbon Tax Could Curb Emissions, Offset Costs for Many Families

A Well-Designed Carbon Tax Could Curb Emissions, Offset Costs for Many Families

September 26, 2019

Carl Davis
Carl Davis
Research Director

The urgency of the world’s climate crisis is on full display, with thousands marching in cities around the world over the past week to demand their elected leaders take action.

One long-standing idea to address climate change is a tax on carbon dioxide emissions that would raise the price of fossil fuels to incentivize a movement toward cleaner forms of energy. A growing number of Democratic presidential candidates have endorsed levying a tax on carbon. This should be a welcome development not just for people concerned about our planet’s health, as a robust carbon tax is among the best ways to slow climate change, but also for social and economic justice advocates.

A well-designed carbon tax packagethat is, levied at a sufficiently high rate and paired with equitable offsets for lower- and middle-income familiescould improve both our environment and the fairness of our tax system.

Given the seriousness of the climate crisis, it is understandable that lawmakers would take a multi-prong approach to address this problem. Eliminating subsidies for fossil fuel companies is a logical place to start, though this change won’t be sufficient on its own. Regulations directly curbing greenhouse gas pollution can also make a meaningful dent in our nation’s carbon emissions and have an important role to play.

But carbon pricing, such as a carbon tax or cap and trade system, can accomplish the goal of curbing emissions while offering a major advantage that a purely regulatory approach lacks: raising meaningful revenue to directly offset the higher costs families will face during the transition to a clean energy economy, and to invest in clean energy initiatives that could accelerate that transition.

To meaningfully cut back on carbon emissions, the price of carbon-based fuel will need to rise significantly. This is inevitable and is one of the key reasons that action on a carbon tax has been so controversial. Households would pay higher prices for gasoline, heating fuel, electricity, and many other goods and services as companies would pass along the expense of a carbon tax to their customers. And there are millions of families in this country who are not well-positioned to afford those higher prices. This is a valid concern that should be addressed, but it is no excuse for inaction.

Under a carbon tax, the federal government would likely use some of the revenue raised by the tax to provide a flat or means-tested refundable credit to households that would more than offset the higher energy prices they would face. This is a key advantage of carbon taxes, both from a policy perspective and a political one. While the carbon tax itself is the key ingredient in combatting climate change, for many families a well-structured rebate or credit could be the more consequential policy when viewed through the lens of their own household budgets.

Lawmakers have a multitude of options to consider when deciding where to direct the revenue raised by a carbon tax, and the debate over those revenues is sure to be intense. But when trying to imagine how such a major policy change might make it across the finish line, it is not at all far-fetched to think that most households might end up paying less, not more, to the federal government under a national carbon tax.

In fact, if the carbon tax rebates paid out to households are structured in a sufficiently progressive fashion, a carbon tax could help to narrow our nation’s widening income and wealth inequality. Many families might find that a carbon tax would be good not just for the planet they’ll be leaving to their children and grandchildren, but for their own economic security as well.



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