A carbon tax can help forge consensus between government and industry on climate policy

With the Biden administration’s commitment to fighting climate change, the pricing of carbon has become a lively topic of debate. Proponents of carbon pricing argue that it is a simple and efficient mechanism for discouraging emissions and ensuring that the negative costs of greenhouse gas emissions (GHGs) are embedded in the prices of carbon-intensive products such as gasoline and petrochemicals. Opponents of carbon pricing argue that the “social cost of carbon” is a malleable concept driven largely by regulators’ assumptions and political considerations. For example, during the Obama years, the Environmental Protection Agency (EPA) set the cost of carbon at $50 per ton, while during the Trump administration the cost was lowered to $36 per ton.

Carbon pricing can take two forms. One approach, adopted by some European countries, is an emissions trading program in which pollution allowances are auctioned and can then be traded between companies. The second approach, adopted by Sweden, Switzerland and several other countries, is a direct tax on the carbon content of products. The advantage of the latter is that it applies to all emitters and doesn’t require much regulatory oversight. 

Several years ago, an American group called the Climate Leadership Council proposed a $40 per ton tax on CO2 emissions, arguing that such a tax would provide a degree of certainty to businesses that emit carbon while reducing burdensome and changing regulations that inhibit new investment. Though the concept generated a great deal of commentary, pro and con, anti-tax sentiment in Congress and the White House stymied any legislation. 

Unfortunately, Congress appears determined to expand the regulatory status quo rather than consider a carbon tax. For example, House Democrats recently introduced a bill, the CLEAN Future Act, that would expand and toughen existing regulations and mandates on most sources of GHGs. Among its provisions, all retail electricity suppliers would have to obtain 100 percent clean power by 2035. Grants and rebates would be offered in the transportation sector to encourage the use of personal and commercial electric vehicles and to install charging stations. The bill would also require all new buildings to be “zero-energy-ready” — consuming only as much energy as can be produced onsite through renewables — by no later than 2030. (Unsurprisingly, the agricultural sector, a huge emitter of CO2 and methane, gets a pass.)

A carbon tax already exists in practice, if not in name. Regulations and mandates are an implicit tax on carbon today, though the government receives no revenue from them. Estimates of the social costs of carbon and methane have been used for years in cost-benefit analyses leading to rules for auto emissions, power plant standards, and oil and gas emissions. Section 45Q of the Internal Revenue Code provides a tax credit of $35 per metric ton for CO2 sequestered from enhanced oil or gas recovery and $50 per ton for geologic storage. The $35 credit is also available for direct air capture projects, which perhaps explains why Occidental Petroleum is investing in air capture facilities that can remove a million metric tons of CO2 from the atmosphere per year.

In contrast to the myriad different environmental mandates and regulations for different industries, a carbon tax would be a transparent, simpler and more efficient mechanism for discouraging GHG emissions, while actually generating some much-needed revenue for the federal government instead of giving it away through tax credits. 

Opponents of a carbon tax claim that consumers and businesses ultimately will bear the cost, which may be the case. But consumers and businesses are already paying the costs of complying with the existing panoply of environmental regulations. And unlike the distorting effects of regulation, a carbon tax would give companies the flexibility to develop their own cost-effective strategies for achieving GHG mitigation. Conceivably, virtually all EPA regulations could be eliminated with a carbon tax, with attendant cost savings for the American public.

To ensure a carbon tax is imposed equitably, it must apply to all GHG-emitting industries, including agriculture. About 10 percent of greenhouse gases are produced in the farm sector from livestock, agricultural soils and rice production, as well as the operations of farm equipment. Methane from cattle by itself represents more than a quarter of all agricultural emissions. 

As a nation, we face two options in dealing with climate change. We can continue to regulate and mandate reductions in GHGs, or we can take a much simpler and transparent approach by adopting a carbon tax, the method overwhelmingly endorsed by the economics profession and a growing number of industries. 

The United States has made great strides in reducing GHGs — in particular, a 65 percent drop in CO2 emissions from the power sector over the past 15 years. A carbon tax promises to accelerate this trend without penalizing particular industries. By embracing a carbon tax, the Biden administration can burnish its environmental bona fides at home while signaling to the rest of the world that America is serious about tackling climate change.

Bernard L. Weinstein is an emeritus professor of applied economics at the University of North Texas in Denton and a fellow of Goodenough College in London.