Tax Policy Issues in Designing a Carbon Tax

by Makari Krause

Carbon taxes have long been thought of as the most efficient and successful way to decrease GHG emissions and thereby curb climate change. Marron and Toder (2014) examine some of the challenges associated with this approach to carbon mitigation, namely setting the tax rate, collecting the tax, and using the revenue. In order to internalize the GHG emissions externality one must tax those emissions at a rate that brings the social cost in line with the private cost. This is referred to as the social cost of carbon and is the price of carbon that would maximize social welfare. Theoretically this approach seems ideal but there are many difficulties involved with determining the social cost of carbon. Determining the true economic effects of GHG emissions is quite difficult and requires complex modeling. These models operate on a set of assumptions that are controversial in many cases. Leading to a wide range of estimates for the social cost of carbon with a mean of $196/ton and a standard deviation of $322/ton. Another important question to ask when calculating cost is whether that cost will be evaluated on a global or national scale. The costs of climate change and the benefits of mitigation are global but often US policymakers exclude global considerations. Continue reading