Tax Adjustment Mechanisms Can Improve Likelihood of Success for Carbon Taxes

WASHINGTON, DC—New findings out today from Resources for the Future (RFF) and the Environmental Defense Fund (EDF) report that a tax adjustment mechanism, which sets emission targets and automatically increases the tax if targets are not met, can improve the effectiveness of carbon taxes by reducing future emissions uncertainty and increasing the probability of hitting specific emissions targets. These findings come as US Senator Richard Durbin (D-Il) introduces America’s Clean Future Fund Act, a carbon pricing bill that includes a tax adjustment mechanism.

Based on new modeling from RFF, the new issue brief clearly shows that these mechanisms can significantly decrease emissions uncertainty under a carbon tax while only modestly increasing the cost of emissions reductions.

The MARKET CHOICE Act of 2018, for example, includes a tax adjustment mechanism that would increase the carbon tax by $2 per ton every two years if emissions goals are not met. RFF modeling estimates that this would increase the likelihood that the bill would achieve its emissions goals by 18 percentage points and cost approximately $1 more per ton of emissions reduced. A policy with a more significant tax adjustment mechanism, as included in the America’s Clean Future Fund Act and other proposed bills, would increase the likelihood even further.

The RFF-EDF issue brief also highlights the importance of design choices on policy outcomes. “Design choice matters,” said RFF Fellow Marc Hafstead, one of the authors. “The policies can be designed to achieve and prioritize different goals, and our paper explains how.”

The issue brief, authored by Hafstead, Susanne Brooks and Nathaniel Keohane of EDF, and Wesley Look (of both RFF and EDF), is based partially on two RFF studies: an article in Review of Environmental Economics and Policy and an RFF working paper.