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Carbon Taxes and Pricing

David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Worldwide Tax Daily. Joining me in the studio this week is Carrie Elliot. Carrie is a contributing editor at Tax Notes International. Carrie, thank you for joining me.

Carrie Elliot: Thank you for having me.

David Stewart: This week we'll be talking about carbon taxes, or more generally, carbon pricing.
Since the Industrial Revolution, global temperatures have risen by an average of one degree Celsius. As policymakers seek ways to hold warming below an admittedly aspirational goal of two degrees, the worlds of tax and environmental policy have intersected. Carrie, what is the basic theory of the carbon tax?

Carrie Elliot: A carbon tax is designed to reduce greenhouse gas emissions. Greenhouse gas emissions trap solar heat in the atmosphere and contribute to global warming. Carbon is often used as shorthand for greenhouse gas emissions because it's the most prevalent greenhouse gas emission. But a carbon tax is intended to penalize those who emit carbon so that they pay the price of the damage and encourage them to reduce their emissions. It's an attempt to price carbon.

David Stewart: Now, if I want to price carbon, what are my options for designing that system?

Carrie Elliot: Well, there's two ways to do that. The first is a straightforward carbon tax, which is just expressed as a dollar amount per metric ton of carbon emissions. The second type is generally known as a cap-and-trade program. And under that, a government basically sets a cap on carbon emissions, divides that cap into quotas, which it then distributes to industries either for free or through an auction. And then if an industry emits fewer than their quota, they can sell those excess emissions to those that emit more than their quota. That way, they set a price on carbon.

David Stewart: Okay, is there an inherent advantage of one system over the other?

Carrie Elliot: It's not one is better than the other; it's a choice. The main difference is that under a straightforward carbon tax, the tax sets the carbon price and the market sets the environmental result. Under a cap-and-trade program in reverse, the program sets the environmental result in the form of the emissions cap, and the market then sets the price of the carbon.

David Stewart: Alright, so the theory seems sound. Put a price on emissions and people will attempt to reduce them. Is anyone actually doing it?

Carrie Elliot: Yes, actually, cap-and-trade programs and carbon taxes are not unusual at all. Now, the price on carbon varies widely. In Sweden, their program prices carbon at about $130 per metric ton, while in Japan and Estonia, it's only about $2 per metric ton. The EU has a cap-and-trade program that prices carbon at about $8 per metric ton. And in North America, California and Quebec have a linked cap-and-trade program that prices carbon at about $13 per metric ton. And a few Northeastern states in the U.S., they have a linked cap-and-trade program that prices carbon at about $6 per ton.

David Stewart: But that seems to be a bit all over the place. Is there any consensus on what carbon emissions should cost?

Carrie Elliot: Not really. The closest thing to that would be perhaps a World Bank report, which estimates that carbon prices would need to be between $40 and $80 per metric ton by 2020. And $50 to $100 per metric ton by 2030 in order to achieve the emissions reduction goals that are in the Paris Agreement. Unfortunately, that same report says that about 85 percent of carbon emissions are not priced at all. And of those that are, about two-thirds of them are priced at below $10 per metric ton.

David Stewart: Now you mentioned the Paris Agreement, which went into effect in 2016 and calls on countries to establish voluntary emissions reduction goals. What does that agreement mean for carbon taxes?

Carrie Elliot: It's intended to address what we call carbon leakage. An industry that is in a country that has a carbon tax will relocate to a country that doesn't in order to save money. So countries that have carbon taxes lose jobs to countries that don't, and yet there's no environmental improvement because the emissions just get relocated to another place.

David Stewart: And how does the agreement address carbon leakage?

Carrie Elliot: The agreement encourages countries to voluntarily reduce their own emissions to targets that they choose themselves. And in this way, the Paris Agreement results in a price on carbon for over half of the globe's emissions. And that alleviates these concerns about carbon leakage.

David Stewart: In June 2017, President Trump announced that the United States would be withdrawing from the Paris Agreement. What effect will that have?

Carrie Elliot: The practical effect of that is that the U.S. is will not be pricing its own carbon at the federal level. The question then becomes whether other countries price U.S. carbon by enacting some sort of cross-border carbon tax.

David Stewart: So despite the position of the administration, are there any efforts in the U.S. to adopt a national carbon tax?

Carrie Elliot: Well, earlier this year, a group of former high ranking Republican government officials released a plan that would tax carbon at about $40 per metric ton, which is estimated to raise about $200 to $300 billion a year. In addition, there were two Democratic senators, Senator [Sheldon] Whitehouse and Senator [Brian] Schatz, who proposed a $49 per metric ton carbon fee that's estimated to raise about $210 billion a year.

David Stewart: Alright, so that's a lot of money. Would it go toward the deficit, or would it be earmarked for something?

Carrie Elliot: Well, the first plan calls for return of the tax revenue to consumers in the form of a carbon dividend. And that would amount to about $2,000 per year for a family of four. The second proposal dedicates the revenue to sort of four different projects or buckets. The first would be a reduction in the corporate tax rate to 29 percent. The second would be refundable payroll tax credits. The third would be matching Social Security benefits. And the fourth is financial assistance to states that are trying to reduce the economic damage from climate change. For example, Florida could use the money to slow down shoreline erosion, and West Virginia could use the money to help coal workers.

David Stewart: Now, I wouldn't mind getting one of those carbon dividends, but realistically, do either of these proposals have any chance?

Carrie Elliot: The proposals have been widely circulated and government is familiar with them, but I do not expect the proposals to become law anytime soon.

David Stewart: Okay, well if there's any change, we'll be sure to have you back. Carrie, thank you for being here. That's it for this week. My guest was Carrie Elliot, contributing editor at Tax Notes International. Thank you for listening. You can follow me on Twitter @taxstew, that's S-T-E-W. Be sure to subscribe to the podcast to make sure that you get the next episode of Tax Notes Talk.

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