This fall brought over 300,000 demonstrators to New York City to march together in the largest climate rally in history. In anticipation of the United Nations’ 2014 Climate Summit, people from all over the world filled midtown Manhattan to demand action from global leaders.
At the summit, President Obama affirmed the United States’ commitment to facing this challenge. He stated: “We have to cut carbon pollution in our own countries to prevent the worst effects of climate change. We have to adapt to the impacts that, unfortunately we can no longer avoid.” The United States, the world’s largest economy and the second largest emitter, is under pressure to lead the world by reducing our domestic carbon pollution through policy reform.
The key question is how to best encourage the reduction of carbon emissions from users. Two of the most frequently suggested alternatives are cap and trade programs and carbon tax systems, both designed to provide financial incentives to reduce carbon emissions.
Cap and trade programs are already implemented in many countries around the world including the European Union. Under this system, a limit is set on the amount of greenhouse gases that can be emitted by covered companies, who then can buy and sell emission allowances to comply with the cap. Over time the limit is reduced so that total emissions fall in the aggregate to achieve climate change goals.
Similar to a cap and trade program, a carbon tax system provides a financial incentive to reduce emissions. A carbon tax requires entities to make tax payments based on measured emissions or emission inputs. Proposals for prices in previously drafted bills range from $15 to $35 per ton of carbon pollution. As this rate would be designed to increase annually, The Urban-Brooking Tax Policy Center has stated that the tax has the potential to bring in $1.2 trillion in revenue over 10 years. This potential for raising revenue could be especially attractive to Congress as they try to fulfill their promise to reform our corporate tax system.
The simplicity and impartiality of the tax has led other countries to adopt a carbon tax system. Some countries, such as Sweden, have experienced great success with the tax, drastically reducing emissions while raising revenue and maintaining an increasing GDP. However, other experiences with the tax have not been as successful. This summer, Australia became the first developed nation to repeal their carbon tax laws after a decade of heated political debate. With these mixed experiences by other countries, questions remain as to how successful a carbon tax would be in the U.S. to simultaneously raise revenue, combat climate change, and maintain a competitive energy policy.