WASHINGTON—A majority of economists feel that the most efficient way to reduce the greenhouse gas (GHG) emissions that contribute to climate change is through a price on those emissions. One policy option, a national carbon tax on fossil fuels, provides price clarity but it does not provide certainty about levels of emissions reductions, due to uncertainty about future emissions levels and mitigation technology. Today, a new discussion paper posted by Resources for the Future (RFF) discusses how greater certainty about emissions reductions can be built into a carbon tax program.
The new paper is, “Adding Quantity Certainty to a Carbon Tax: The Role of a Tax Adjustment Mechanism for Policy Pre-Commitment” (TAMPP). The authors are RFF Senior Fellow Roberton Williams, RFF Fellow Marc Hafstead, and Gilbert. E. Metcalf of Tufts University and the National Bureau of Economic Research.
The means for a carbon tax adjustment is a straightforward legislative and policy approach: If emissions over a set period of time deviate from intermediate GHG-reduction benchmarks set by the policy, the tax rate is designed to adjust in order to bring emissions back toward the benchmarks. The United States, for example, committed in its Paris Agreement goals to an economy-wide target of reducing greenhouse gas emissions by 26-28 percent below 2005 level in 2025. A carbon tax with an adjustment component would offer more control in meeting such goals.
The authors point out that policymakers face a host of design choices for such a mechanism that include both legislative mandates and policy adjustments. The document released today enumerates various elements providing guidance to policymakers. “What is most important,” the authors note, “is clarity and certainty in the rules for the tax rate adjustment so that the businesses and individuals can respond with reasonable confidence to likely future government policy.”