Discussion Paper

Adding Quantity Certainty to a Carbon Tax: The Role of a Tax Adjustment Mechanism for Policy Pre-Commitment

Oct 12, 2016 | Marc Hafstead, Gilbert E. Metcalf, Roberton C. Williams III

Summary

Enacting a Tax Adjustment Mechanism for Policy Pre-Commitment (TAMPP) as part of a national carbon tax can offer greater certainty about emissions reductions.

Key Findings

  • A carbon tax provides price clarity but does not provide certainty as to the quantity of emissions reductions due to uncertainty over future emissions trajectories, costs, and mitigation technology.
  • We introduce a Tax Adjustment Mechanism for Policy Pre-Commitment (TAMPP), an adjustment mechanism for the rate of a carbon tax to ensure that emissions milestones are met over a given timeframe.
  • The basic structure of a TAMPP is straightforward. A time profile of tax rates is set over a control period. If emissions deviate from intermediate benchmarks set by the policy, the tax rate adjusts in order to bring emissions back toward the benchmarks
  • Policymakers face a host of TAMPP design choices; we discuss the various options for each design choice and provide guidance, where possible, to reduce policy risk and policy-induced uncertainty.
  • More research on TAMPPs is needed to evaluate various design choices and for comparison to alternative policies.

Abstract

A concern often raised about a carbon tax is that it does not provide any certainty as to the quantity of emission reductions achieved under the policy. We explore in this Issue Brief how greater emission reduction certainty can be built into a carbon tax. We first define a Tax Adjustment Mechanism for Policy Pre-Commitment (TAMPP). A TAMPP is an adjustment mechanism for the tax rate of a carbon tax to ensure that targeted emission reduction milestones are met over the next few decades. We then provide some guidance based on economic principles related to various design considerations that should be incorporated in a cost-effective and politically realistic TAMPP.