Is the U.S. Ready for a Carbon Tax?

Is the U.S. Ready for a Carbon Tax? Paul J. Lee, Ph.D, CPA

The Necessity for Action • Unnatural ecological changes due to global warming, which is caused by the increase of carbon dioxide emissions. • The greatest rise of carbon dioxide emissions was within the past 30 years.

Alternative energy sources • Many attempts to substitute and replace nonrenewable energy with alternative fuel sources such as ethanol, corn, hydrogen power and solar power has not succeeded the over-consumption of fossil fuels.

The Kyoto Protocol • Established in 1997 • Adopted by 37 countries • Mandatory reduction of greenhouse emissions • The U.S. did not participate, being the primary contributor of greenhouse pollution.

Cap and Trade System • A market-based approach used to control pollution by providing economic incentives. • Cap: Government allotted amount of emissions each company will be allowed to produce. • Trade: Industries will be able to “trade” left over credits to other companies for profit.

Purpose of the Cap and Trade System • To minimize the overall carbon emissions to a safer level than are currently permitted. • The cap serves as an accountability system amongst companies • Trade allows for independence and flexibility

Criticism of Cap and Trade • The European Emissions Trading Scheme has undergone the cap and trade method for 2 years, but has fallen short of expected results. • When the cap is set too high: carbon emissions will not be reduced enough to decrease greenhouse pollution and change the behaviors of the companies. • When the cap is set too stringently: companies will struggle to realistically reduce carbon emissions, while also having to increase the cost for consumers to afford the trade for more credits.

Potential of the Cap and Trade System • Can reduce carbon emissions greatly in the long run, although results may seem insignificant in the short run. • Success depends on how earnestly the nation is committed, and how flexible they are.

Carbon Tax • The amount taxed to producers of carbon emissions based on the measurement per company/individual, by area.

Benefits of Carbon Taxation • Simple • Quicker to implement • Encourages the reduction of carbon emissions • Enforceable on a smaller scale • Can be adopted in a relatively short time span • Initiative for companies who over-produce carbon emissions to either improve their habits or pay for their damages. • Can provide tax incentives

Impact of Consumer Behavior • Carbon taxation can make individuals and companies more aware of the detriment of greenhouse pollution. • Individuals can make a significant impact on decreasing carbon emissions (ex: purchasing hybrid cars)

Tax Incentives for America • Fuel-inefficient cars would be more heavily taxed than fuel-efficient cars. • The tax money would be spread to those who more mindful of conserving fossil fuels. • Subsidize the costs of more fuel-efficient cars and hybrids for other ecologically-minded consumers. • Tax incentives and rebates when purchasing a hybrid car has a strong influence on the public. • Would motivate consumers to buy eco-friendly cars.

Considering Factors between Cap and Trade & Carbon Taxation • Both are market-based policies • Important factors: • How efficiently the policy can be implemented • How well the policy can be managed • How the policy influences both the environment and the economy in the future

Strengths & Weaknesses of the Cap and Trade System • Strengths: Decrease the cost of emissions in comparison to normal regulatory methods. • Balance and encourage flexibility. • Weaknesses: Easy to manipulate and bargain for more credits. • Can be overbearing and oppressive to consumers. • Does not have a mechanism to decrease the additional burden of the high-energy prices on the population

Strengths & Weaknesses of Carbon Taxation • Strengths: More manageable than a cap and trade system. • More straightforward to tax and obtain the taxes. • More efficient and takes less time to initiate. • Direct and comprehensive target and achieve both short-term and long-term goals in carbon emission reduction. • Weaknesses: People conceptually assume that being taxed is negative. • Will not fix the damage already done.

Conclusion The cap and trade system would help to limit the usage of carbon emitting fuels, it leaves room for error from the start. However, carbon taxation would give companies the realization of the detrimental impact of pollution to the environment and encourage them to lessen their carbon emission. Carbon taxation has potential to benefit the U.S. economy, and if implemented with the cap and trade system, they could create a more effective and opportune solution.

Is the U.S. Ready for a Carbon Tax?