Carbon Taxes: A Viable Alternative to the Emissions Caps?

According to a recent poll conducted by Stanford University, 78 percent of Americans believe the federal government should regulate greenhouse-gas emissions. While the majority can agree that limiting and regulating these emissions is a good thing, the policy prescriptions are often more controversial.

The current strategy by the U.S. Environmental Protection Agency and other federal agencies involves simply capping the amount of greenhouse-gas emissions. This is evident by the so called Clean Power Plan which would set designated carbon emission reduction targets on power plants in the states. The idea here is that states would have some flexibility in designing plans to meet these goals through a combination of renewable energy and energy-efficiency mandates. This plan has some positive benefits, such as allowing states to design plans that fit their needs and not rigidly managing them based on a one-size-fits-all regulatory regime.

While capping carbon emissions is the obvious plan of action when looking to reduce greenhouse-gas emissions, there can be some unintended consequences. For example, states that are heavily reliant on carbon-based electricity generation because of the presence of abundant natural carbon resources may be unfairly punished under this plan. Also, states that have already taken steps to reduce carbon emissions may need to implement more drastic and anti-competitive policy choices to meet the cap.

As an alternative to the simple capping of carbon emissions, carbon taxes have emerged as a potential solution. A carbon tax in its most basic form would tax producers of carbon emissions using a calculated price per pound of CO2.

Carbon taxes have a number of advantages over emissions caps. When carbon has a price, companies will be incentivized to lower their emission rates through innovation. For example, if it wasn’t feasible to convert a manufacturing facility over to renewable energy in the past, the price signal may now allow for that under the carbon tax regime.

Another benefit over a simple cap would be the revenue raised from the tax. Most carbon-tax plans are designed to be revenue neutral with all revenues raised by the tax used to offset other taxes, such as the corporate income tax. Using income from a carbon tax to lower the corporate income tax also has a practical political benefit and can be something lawmakers on both sides of the aisle can appreciate.

Despite these positive qualities, carbon taxes are not without their flaws. Because the price of carbon cannot be calculated using the free market, it is hard to get it right. Jurisdictions that have already implemented a carbon tax have found that often the price they set is too high or too low and doesn’t provide the intended effects. Also, once a tax is in place, it is virtually impossible for one Congress to tie the hands of the next in regards to how the revenues are allocated, thus negating the revenue neutrality of the tax.

While both of the plans have negative consequences, most people agree something must be done to reduce carbon emissions in the U.S. Under either of these plans, improving the energy efficiency of commercial buildings will be an integral part of the solution. Commercial buildings are responsible for roughly 45 percent of greenhouse-gas emissions in the nation. Making choices, such as including polyisocyanurate foam insulation in the design of a building is an excellent way to improve the energy efficiency of your building and reduce harmful greenhouse-gas emissions. The road to reducing emissions will not be easy but is something that can be accomplished through innovative public policy decisions and education.

About the Author

Jared O. Blum
Jared O. Blum is Washington counsel for the EPDM Roofing Association.

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