Press Release

A Flexible Carbon Tax in an Uncertain World

Jan 31, 2017

WASHINGTON—The primary policy objective of a national carbon tax is to efficiently drive down greenhouse gas emissions that contribute to climate-change risks. Economists widely regard it as a policy tool that can provide a clear, predictable price signal for businesses and households. However, it comes with some fundamental uncertainties—uncertainties about environmental benefits produced, about economic costs incurred, and about international implications created. But according to a new paper posted today by Resources for the Future (RFF) and written by Joseph E. Aldy, associate professor of public policy at Harvard University and an RFF visiting fellow, those challenges can be addressed to great overall advantage.

The new paper is “Designing and Updating a US Carbon Tax in an Uncertain World.” In it, Dr. Aldy describes the design of a process for routinely reevaluating a carbon tax every five years in light of any new information.

Under this idea of “structured discretion,” the president of the United States routinely would recommend an adjustment to the carbon tax based on analyses by the US Environmental Protection Agency, the Department of the Treasury, and the Department of State on the environmental, economic, and diplomatic dimensions of climate policy. Under the plan, Congress then would have the opportunity to vote up or down on any presidential recommendation for an adjustment without the prospect of filibuster or amendment.

Dr. Aldy points out that this approach is far from untested. It is similar to the expedited, streamlined consideration of regulations under the Congressional Review Act and trade deals under trade promotion authority. The communication of the latest data and analysis also could serve as “forward guidance” for adjustments, not unlike the Federal Reserve Board’s reporting.

The paper also points out that the timing of this process could be synchronized with the updating of nationally determined contributions for international carbon reduction under the Paris Agreement in a manner to leverage greater emissions mitigation ambition by other countries in future pledging rounds.

Read the full paper: Designing and Updating a US Carbon Tax in an Uncertain World.

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Resources for the Future (RFF) is an independent, nonpartisan organization based in Washington, DC, that conducts rigorous economic research and analysis to improve environmental and natural resource policy.