How Much Is the Carbon Tax

Financial institutions are increasingly using internal carbon pricing as a tool to evaluate their investments by including the cost of carbon in the economic analysis of new projects. This is due in particular to a better understanding and measurement of their carbon footprint and the systematic integration of negative externalities of CO2 emissions into project assessment, as part of commitments to support low-carbon solutions through their loan portfolio. The phrase «putting a price on carbon» has now become popular as momentum grows between countries and businesses to put a price on carbon pollution to reduce emissions and encourage investment in cleaner options. Tax rates can also be influenced by political factors, such as the impact on energy prices. Some prefer carbon tax rates that start low, so the effects of the political phase begin gradually. A carbon tax differs from a cap-and-trade program in that it provides a higher degree of certainty about the cost, but not about the level of emissions reductions to be achieved (cap and trade does the opposite). In 2020, about 12% of emissions came from countries or sectors that applied a carbon tax. Only 6% were covered by a commercial system. This means that a total carbon price had to be paid for 18% of global emissions. Determining the «right» price for carbon has proven difficult.

Many argue that the price of carbon should be linked to the social cost of carbon (CCS) – an estimate of the total economic damage associated with each tonne of carbon emissions. Climate economist William Nordhaus estimates that CCS was $31 per tonne in 2015, but will reach $44 per tonne by 2025 and $52 per tonne by 2030. The Obama administration`s EPA has calculated similar estimates: $36 per ton in 2015, rising to $46 per ton by 2025 and $50 per ton by 2030. Using a different approach, the High-Level Commission on Carbon Prices, drafted by the United Nations Framework Convention on Climate Change, estimated that achieving the Paris Agreement`s goal of limiting warming to two degrees would require a universal carbon price of $40 to $80 per tonne by 2020 and $50 to $100 by 2030. Only 3.76% of global emissions are currently covered by a price of $40 to $80. International Monetary Fund economists went even further, suggesting that large emitters would need a carbon price of $75 per tonne to achieve sufficient emissions reductions. Note on the Consumer Rebate Act: The Consumer Remittance Act includes annual adjustments for carbon levy inflation, but the E3 analysis requires annual adjustments for inflation. Therefore, our projections model the policy as if it included these adjustments. As part of a carbon tax, the government sets a price that emitters must pay for each tonne of greenhouse gas emissions they emit. Businesses and consumers will take measures, such as changing fuel or introducing new technologies, to reduce their emissions and avoid paying the tax.

Now, President Biden and congressional Democrats must find a way to achieve these goals. The Democrats are in the middle of negotiations on a potentially very effective climate law. As part of the budget vote process, Democrats are proposing a $3.5 trillion spending bill, a significant portion of which would be used for climate-related provisions. Representatives floated ideas such as investing in electric vehicle infrastructure, creating a «civil climate corps» and even introducing a carbon border tax. Even some U.S. states have adopted carbon pricing systems: California launched its cap-and-trade system in 2013, while Washington state voted to introduce its own carbon pricing system in April 2021. Eleven states1 in the northeastern United States participate in the Regional Greenhouse Gas Initiative, a localized cap-and-trade system that covers 18% of participating states` emissions. Hawaii`s Senate has declared plans to consider a carbon tax in 2022, while Oregon lawmakers have tried unsuccessfully to create a cap-and-trade system in 2019. A carbon price could help the U.S. reverse its lagging global position on climate issues and demonstrate its commitment to reducing greenhouse gas emissions using the most advanced and efficient techniques available. The second approach is to implement an emissions trading system (ETS, also known as a cap-and-trade system) for carbon emissions. This system limits carbon emissions to a certain level for a group of companies or industrial installations, and then issues emission allowances based on that level.

Companies must be eligible for each tonne of carbon they want to emit, either directly from the government or by trading with each other. Under an ETS, the price of carbon fluctuates according to market demand for emissions, but the total amount of emissions is known. Carbon pricing can reverse this trend. The introduction of a sufficiently high carbon price should have a significant impact on carbon emissions. A 2019 report by the Brookings Institution predicts that a carbon tax of $25 per tonne, increasing by one percent per year, would reduce emissions by 17 to 38 percent by 2030 from the 2005 baseline. According to their calculations, a carbon tax of $50 per tonne, increasing by five percent per year, would reduce emissions by 26 to 47 percent from 2005 levels — up to 90 percent of the reductions needed to meet President Biden`s Paris Agreement goal.