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Putting a price on carbon is a critical part of a low-cost strategy for reducing greenhouse gas (GHG) emissions, and a national carbon tax is a rare example of a climate change policy that has found bipartisan support in the United States. In 2018, legislation establishing a carbon tax was proposed by Democrats, Republicans, and bipartisan groups of US congressmen. However, while passing a carbon tax would certainly prove a significant step toward slashing emissions, simply adding a carbon tax to current policies is unlikely to achieve an emissions target at the lowest cost.
Designing a carbon tax that contributes to achieving greenhouse gas reduction targets effectively and efficiently will require an examination of whether other new policies are also needed and whether existing policies can or should be changed or eliminated. With more proposals expected in 2019, such an examination is critical to ensuring both sufficient emissions reductions and an efficient set of policies that keep costs in check for taxpayers.
As part of a broader carbon tax research program at the School of International and Public Affairs Center on Global Energy Policy at Columbia University, we have developed a framework for considering the interactions between a federal carbon tax and other policies that influence greenhouse gas emissions. Toward the goal of helping to design better policies, we identify policies and programs that are “complementary” to a carbon tax or “redundant.” A policy is defined as complementary if it:
Conversely, a policy is defined as redundant with a federal carbon tax if it leads to additional costs to society without achieving additional emissions reduction.
In developing this framework, we recognize that real-world policies often do not fall cleanly into either category and that neither specifying the framework nor making the categorizations is an exact science. It is often difficult to identify a policy’s objective or evaluate its cost-effectiveness. In addition, the extent to which a policy complements a carbon tax depends on the nature of the carbon tax. Most obviously, with a lower carbon tax rate, fewer emission reductions would be achieved, and additional policies may be needed to make up the difference between the outcome and a science-based emissions reduction target.
The results of the work, highlighted in the following table, indicate a relatively large number of policies can complement a carbon tax, such as those that support innovation in low-carbon technologies, tackle behavioral barriers to more efficient energy use, or improve public infrastructure and address barriers to reducing emissions unrelated to the price-related barriers addressed by a carbon tax. Conversely, the paper identifies regulations that force entities that pay the carbon tax to take specific actions to reduce their emissions, such as Environmental Protection Agency regulations of stationary sources of carbon dioxide emissions under section 111 of the Clean Air Act, as redundant with the carbon tax. The paper does not recommend which policies should be eliminated, changed, or added but intends to provide policy makers with information that will help them make these decisions.
The following table uses our framework to characterize policies that reduce greenhouse gas emissions. By putting your cursor over the policy category, you will find a short rationale for the characterization.
A policy is complementary to a federal carbon tax if it satisfies either the following two criteria:
(1) Cost-effectiveness: the policy enables more cost-effective reductions of greenhouse gas emissions than a carbon tax would achieve on its own
(2) Separate objective: the policy reduces greenhouse gas emissions and achieves a separate policy objective more cost-effectively than a federal carbon tax
A policy is redundant to a federal carbon tax if it leads to additional costs to society without achieving additional emissions reductions.
Regulations of GHG emissions not covered by the carbon tax
Well-designed regulations achieve low-cost emissions reductions outside the scope of the carbon tax.
Regulations of local air pollutants
Regulations of non-greenhouse gas emissions are designed primarily to achieve improved local air quality, but often achieve reductions in greenhouse gas emissions as well.
Removing fossil fuel subsidies
Eliminating fossil fuel subsidies, which are essentially negative carbon taxes, will make low-carbon technologies more cost-competitive while raising government revenues.
Energy efficiency standards and programs
Well-designed energy efficiency policies address barriers to reduced energy use that a carbon tax does not fully address, including information failures, principle-agent problems and the short-sightedness of consumers, among others.
Funding innovation in low carbon technologies
The private sector underinvests in technological progress because it does not capture the full benefits of innovation to society. Governments can fill this void by funding research, development and demonstration projects for low carbon technologies.
Public infrastructure supporting low carbon transportation and land use
Well-designed public infrastructure and land use policies can reduce the costs of shifting to lower-carbon energy uses.
Fuel economy standards
While current standards are a relatively expensive approach to reducing emissions, alongside a carbon tax, well-designed fuel economy standards can address barriers to reduced fuel use and innovation in alternative-fuel vehicles that a carbon tax does not fully address.
Fuel economy standards have numerous goals in addition to reducing emissions, including reducing fuel imports.
Subsidies for low-carbon technologies
While subsidies are redundant to a carbon tax in making low-carbon technologies more cost-competitive, subsidies for emerging low-carbon technologies can address barriers to the adoption of (and thus innovation in) new energy technologies that a carbon tax does not fully address.
Certain subsidies are implemented at least in part to accomplish objectives aside from reducing emissions, including the support for industries within a jurisdiction.
Renewable or low-carbon fuel standards
While current fuel standards are a relatively expensive approach to reducing emissions, alongside a carbon tax, well-designed standards can address barriers to the adoption of (and thus innovation in) emerging low-carbon fuels that a carbon tax does not fully address.
Current fuel standards exist in part to promote domestic industries and reduce fuel imports.
State carbon pricing policies
The objective of state carbon pricing policies is often in part to raise revenues for the state, but these policies are not necessarily more cost-effective approaches to raise revenue compared to a federal carbon tax.
Fuel excise taxes
An objective of fuel excise taxes is to raise revenue, but they do not necessarily do so more cost-effectively than a federal carbon tax. Fuel excise taxes can also be viewed as cost-effective ways to address the negative consequences of fuel use aside from the associated greenhouse gas emissions.
Renewable or clean electricity standards
Renewable or clean electricity standards are unlikely to enable more cost-effective emissions reductions than a well-designed federal carbon tax.
But many renewable or clean electricity standards have additional policy objectives, including improving air quality and promoting industries within a jurisdiction.
Regulations of GHG emissions covered by the carbon tax
Alongside a well-designed federal carbon tax, policies that force sectors or entities that are covered by the carbon tax to take specific actions or to achieve specific targets will not enable more cost-effective emissions reductions.
Recently CGEP, in partnership with Columbia Global Centers | Santiago and the Center on Business and Society at the Business School - Universidad Adolfo Ibañez in Chile, hosted a private roundtable.