This report describes how a carbon tax can be designed to achieve given emission reduction targets.
Interest in a hybrid carbon tax that provides some assurance that emissions reduction targets will be met has emerged recently. To better understand how such a hybrid tax could work, I describe a prototype emissions assurance mechanism (EAM) to provide policy certainty that is practical, simple to implement, and easily understood. I outline an EAM that would lead to a 45 percent reduction in energy-related carbon dioxide emissions by 2035 relative to emissions in 2005. In 2035, an assessment would be made about a target reduction in emissions for the next 15 years. Emissions are compared with an emissions pathway in each year. So long as cumulative emissions since the first year of the carbon tax do not exceed cumulative emissions along the emissions pathway, the carbon tax rate would increase at a standard escalator of 5 percent per year (plus inflation). If cumulative emissions exceed cumulative emissions along the pathway, an accelerated escalator of 10 percent would be used to increase the tax rate each year. Similarly, if cumulative emissions fall well below the pathway, the tax rate would be held constant (in real terms). The emissions pathway and EAM would be built into the carbon tax legislation.