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An Economic Case for a Carbon Tax Policy

Mar 24, 2011

An Economic Case for a Carbon Tax Policy

RFF Feature
March 24, 2011

Now is the perfect time to reevaluate the main options for moving U.S. climate policy forward, given that Congress has been unable to pass a comprehensive climate bill. There are three broad areas for consideration. First is some form of cap-and-trade policy, though perhaps less ambitious in both scale and scope than what has previously been proposed. Second is its market-based rival—a tax on the carbon dioxide (CO2) potential of fossil fuels. And third are the regulatory alternatives, the most promising of which is an emissions rate standard for (new and existing) power generation sources.

In “Moving U.S. Climate Policy Forward: Are Carbon Taxes the Only Good Alternative?” authors Ian W.H. Parry and Roberton C. Williams III assess the costs and economic benefits as well as the efficiency and feasibility trade-offs of the policy alternatives, noting the overall policy goal of reducing domestic, energy-related CO2 emissions. Considering economic efficiency as the primary criterion, there is a solid case for moving ahead with carbon tax shifts in the United States. This policy would not only achieve climate objectives, but could also provide enough revenue to cover roughly a third of the projected federal budget deficit out to the year 2030.