Implementing+a+Carbon+Tax

=**Introduction **=

toc A carbon tax is a government collected tax that works by assigning a price to each ton of carbon emitted [1]. Climate change, as a result of carbon emissions, is widely considered to be one of the most important challenges facing humanity this century. The great importance of this issue has created a need for effective policy to substantially limit carbon emissions. A market-based approach is considered by many to be favorable for efficiency reasons, and one example that has piqued public interest is the carbon tax [2][3]. As a result of this importance, substantial research has been done into the various factors that would be required for a carbon tax to be implemented, as well as the effect of the tax once implemented. Several major concepts have been considered in the literature. Foremost in setting a tax is the actual amount taxed, and researchers have also looked into how the tax would cost the economy. In addition, strong emphasis has been placed on how the revenues from this tax should be used. Two preeminent examples are altering capital tax rates, for efficiency, or a lump sum rebate, for popularity and economic equality. The literature has also considered the effectiveness of the tax at limiting carbon emissions, and these analyses have also begun to incorporate case studies where forms of the tax have actually been implemented.

=**Pricing the Tax **=

Pricing the tax is a critical area of exploration. Suggestions in the literature have ranged anywhere from $5 to $100 per metric ton and possibly even more [4]. Setting a price is difficult for several reasons. One of the current strains of thought is that each ton of carbon should be given the price equal to the damage caused by an additional ton of emissions [4]. However, it is also not possible to know exactly how much damage carbon would cost, or whether there is the potential for a catastrophic situation, in which case the tax should be as high as needed to avoid this situation [4]. Another difficulty is gauging how much any one country should pay for a problem that is global in scope [1]. For example, before Australia implemented its own tax, most Australians felt that they shouldn’t have a tax before the Chinese or Americans [5]. The U.S. bears only a minority of the cost of the damages of carbon, so if U.S. policymakers were to ignore the global perspective and only consider their own country, then a carbon tax implemented in America would only be priced at a fraction of the global damage of carbon emissions [1].



 As a corollary to the initial price, the change of the tax after implantation must also be considered. It is generally thought that increasing the tax over time would be most beneficial, to allow for a gradual transition [1]. When British Columbia implemented its carbon tax, it started at ten Canadian dollars per ton, and rose by five dollars per year, before capping at thirty dollars [6]. Finally, the effect of the price of carbon on economic growth is very important also. Studies have found that globally implementing a carbon tax could actually increase the welfare of many countries [3]. One of the considered international implementations of a carbon tax would be through taxing the emissions of freights for maritime shipping. For a global carbon tax of $30 USD per ton of carbon emissions on maritime shipping, the U.S. would sacrifice 0.0008% of GDP, while for a $90 tax, it would be 0.0023%, roughly proportional [7].

=**Economic Costs **=

Two major costs are typically ascribed to the carbon tax. The first is that implementing a carbon tax would cause loss to GDP, not only for the country implementing it but also for countries that export there as well [7]. The other problem is that a carbon tax is typically shown to be regressive, from the perspective of a demand-side argument [8]. Taxing carbon induces higher energy prices, which typically affect lower income households more, as they spend a greater proportion of their income on areas affected by energy prices [9]. Studies are sparser on the effect of supply-side changes resulting from the carbon tax, though there is evidence to suggest that a carbon tax might not be as regressive with this factored in, and could perhaps even be progressive [9].

=**Using the Revenue **=

By definition, a tax generates revenue for the government, and a carbon tax could raise a substantial amount for the U.S. government if implemented in the U.S [10]. Depending on how this revenue is used, implementing a carbon tax could actually lead to a larger GDP, or work to reduce economic inequality [11]. A portion of the revenue from the tax could also be used to reduce government deficits while simultaneously limiting emissions, allowing for the execution of two policy objectives at once [12].

**Capital Taxes **
The revenues from a carbon tax could be used to reduce taxes on capital or to provide an investment tax credit [8][12]. By causing these reductions in taxes, the GDP could actually be greater than it would have been without the carbon tax present [10]. The revenue provided by the carbon tax offsets the revenue lost by reducing capital taxes, but the economic loss caused by a carbon tax is less than the economic loss caused by capital taxes, resulting in the most efficient use of the revenue [12]. While providing a substantial benefit, using revenue in this way substantially increases the regressive nature of the tax. Since wealthier households stand to make more from capital than poorer households, a reduction in capital taxes disproportionately benefits them [11].

**Lump Sum Rebate **
The literature also frequently considers the policy of a lump sum rebate for the revenues of a carbon tax. Under this system, each citizen would be reimbursed an equal share of the revenues from the carbon tax after it has been collected [11]. This system has a couple of benefits. Firstly, as a result of providing more money to households, it would stimulate the economy by increasing consumption [8][9]. Furthermore, it could create a system where a large portion of the U.S. population actually ends up with more money than if the tax had not been implemented, with the median household gaining around $279 for a $30 per metric ton tax [11][9]. This is especially important considering the role of public support in a democratic society since without this support, it is unlikely climate change policy could be implemented and maintained [5]. A lump-sum rebate provides a mechanism for the majority of households to benefit, and thus for a majority of voters to benefit [11]. In addition, a lump-sum rebate also helps mitigate the regressive nature of the carbon tax. With a $30 tax per ton, the bottom 20% of income earners would earn about $1000, while the top 20% of income earners would actually lose about $6000 [11]. Again, this demonstrates the capacity of the carbon tax to achieve a second policy goal (in this case limiting inequality) while also acting as a mechanism for mitigating climate change. However, despite these benefits, a lump-sum rebate is arguably the least efficient method for using the revenue, and thus causes a greater cost to the economy than reducing capital taxes [8][11].

=**Limiting Emissions **=

A strong motivating factor for the use of a carbon tax is its efficacy at emissions reductions. The Scientific consensus is that climate change is a constant threat, so developing a policy to deal with it effectively is becoming progressively more necessary [11][2]. The carbon tax is considered an effective market-based policy choice to achieve these goals [8]. Studies have indicated that environmental damage could be reduced by almost 50% as a result of every country adopting an appropriate carbon tax [3]. It is the general consensus that as a result of its carbon tax, British Columbia has reduced its emissions significantly [6].

 <span style="font-family: Arial,sans-serif; font-size: 12pt;">Additionally, the British Columbia tax only applied a carbon tax to specific fuels. Analysis seems to indicate that emissions decreased for fuels subject to the tax, but not for fuel not subject to the tax [6]. This is important because it demonstrates the effectiveness of the tax by allowing us to compare taxed and untaxed fuels. Instead of distributing the money back to the public through taxes reductions or rebates, if the revenue from the tax is used to construct clean energy infrastructure (solar, wind, nuclear etc.) then the tax becomes even more effective at limiting emission [2]. A carbon tax with this infrastructure is projected to substantially reduce U.S. emissions in sectors such as utilities, anywhere from 38% to 74% [2].

=**<span style="font-family: Arial,sans-serif; font-size: 12pt;">Conclusion **=

<span style="font-family: Arial,sans-serif; font-size: 12pt;">Analysis of existing studies provides strong evidence to suggest that a carbon tax would not only be effective at limiting carbon emissions but that it would be able to provide an effective mechanism for other policy goals as well, from reducing the deficit to reducing economic inequality [11][12]. A general consensus exists over several of the major topics. The literature suggests that the tax would be generally effective at reducing emissions and that there are several ways to use the revenue to mitigate the economic costs that it might incur [3][8].

<span style="font-family: Arial,sans-serif; font-size: 12pt;">Nonetheless, there are still several areas of exploration left. While studies have examined different concepts for pricing the tax, there remains no consensus on what the price should be in any country, and there remains a large amount of deviance between studies [1][11][4]. Other areas of active research also include the impact of carbon taxes across income groups and countries. While studies essentially seem to demonstrate consensus that demand-side economics heavily imply the regressively of the tax, work needs to be done to better predict how supply-side factors could affect different income groups [8][9]. Furthermore, the incidence across countries remains an area of exploration, in particular, the different effects of a carbon tax on countries of different levels of income and development [3]. These areas pose an interesting direction for the research of carbon taxes. Namely, future research must greatly broaden the scope of people and regions considered when it looks at the impact of a carbon tax.

=**<span style="font-family: Arial,sans-serif; font-size: 12pt;">References **=

<span style="font-family: Arial,sans-serif; font-size: 12pt;"> [1] D.B. Marron, E.J. Toder, “Tax Policy Issues in Designing a Carbon Tax,” //American Economic Review//, vol. 104, no. 5, pp.563-568, 2014.

<span style="font-family: Arial,sans-serif; font-size: 12pt;"> [2] S. Sewalk, “Carbon Tax with Reinvestment Trumps Cap-and-Trade,” //Pace Environmental Law Review//, vol. 30, no.2, 2013.

<span style="color: #333333; font-family: Arial,sans-serif; font-size: 12pt;">[3] P. K. Wesseh, B. Lin, P. Atsagli, “Carbon taxes, industrial production, welfare and the environment,” //Energy//, vol. 123, pp. 305-313, 2017.

<span style="font-family: Arial,sans-serif; font-size: 12pt;">[4] B. Litterman, “What Is the Right Price for Carbon Emissions?” //Regulations//, vol. 36, no.2, pp. 38-43, 2013.

<span style="font-family: Arial,sans-serif; font-size: 12pt;">[5] A. Robson, “Australia’s Carbon Tax: An Economic Evaluation,” //Economic Affairs//, vol. 32, no.1, pp. 34-35, 2014.

<span style="font-family: Arial,sans-serif; font-size: 12pt;">[6] B. Murray, N. Rivers, “British Columbia’s revenue-neutral carbon tax: A review of the latest “grand experiment” in environmental policy,” //Energy Policy//, vol. 86, pp. 674-683, 2015.

<span style="font-family: Arial,sans-serif; font-size: 12pt;">[7] T. Lee, Y. Chang, P.T.W. Lee, “Economy-wide impact analysis of a carbon tax on international container shipping,” //Transportation Research Part A: Policy and Practice//, vol. 58, pp. 87-102, 2013.

<span style="font-family: Arial,sans-serif; font-size: 12pt;">[8] A. Mathur, A. Morris. “Distributional effects of a carbon tax in broader U.S. fiscal reform,” //Energy Policy//, vol. 66, pp. 326-334, 2014.

<span style="color: #333333; font-family: Arial,sans-serif; font-size: 12pt;">[9] Y. Dissou, M. Siddiqui, “Can carbon taxes be progressive?” //Energy Economics//, vol. 42, pp. 88-100, 2014.

<span style="font-family: Arial,sans-serif; font-size: 12pt;">[10] W. McKibbin //et al//. (2012, July). //The Potential Role of a Carbon Tax in U.S. Fiscal Reform// [Online]. Available: https://www.brookings.edu/research/the-potential-role-of-a-carbon-tax-in-u-s-fiscal-reform/

<span style="color: #353535; font-family: Arial,sans-serif; font-size: 12pt;">[11] R. Williams //et al//. (2014, August). //The Initial Incidence of a Carbon Tax across Income Groups// [Online]. Available: http://www.rff.org/files/sharepoint/WorkImages/Download/RFF-DP-14-24.pdf

<span style="color: #333333; font-family: Arial,sans-serif; font-size: 12pt;">[12] S. Rauch, J. Reilly, “Carbon Taxes, Deficits, and Energy Policy Interactions,” //National Tax Journal//, vol. 68, no.1, pp.157-178, 2015.