Frequently Asked Questions 

Many economists champion a carbon fee, but isn’t it one of those ideas that is nice in theory but has never been tried in the real world?

Twenty-one nations have implemented a carbon fee, and these initiatives cover over five percent of global GHG emissions. These nations include Canada, Norway, Mexico, and Japan. The results are encouraging. British Columbia implemented a revenue-neutral carbon tax in 2008 and reduced fossil fuel consumption by 16 percent, while use in the rest of Canada rose by three percent. Meantime, British Columbia’s GDP growth outperformed the country as a whole. Prime Minister Trudeau has announced that by 2022 Canada will have a single national carbon price no less than $50 CAD. This effort has the support of the four largest provincial governments, much of the nation’s hydrocarbon industry, the Canadian Mining Association, and most citizens.

How would carbon be priced in the U.S.?

Most simply, a fee could be imposed on carbon fuels when they are first introduced into the economy - for example, at the coal mine, at the oil refinery gate, and at gathering stations for natural gas - - based on the anticipated release of CO2 when they are combusted. Under this construct, a fee of $49 per metric ton (MT) of anticipated carbon dioxide emissions, if instituted in 2020, would generate $2.2 trillion by the end of 2029.

Why not apply the fee closer to the end user?

An upstream tax, as proposed above, can be levied using an existing administrative structure in which carbon fuels are already measured for other purposes. This approach is simple to execute, applying to fewer than 2,400 taxpayers. It would involve very little additional cost or administrative structure, would be very transparent, and would make it relatively easy to track the exact amounts collected each year.

Why not adopt a cap-and-trade approach, which the House passed in 2009?

That cap-and-trade bill, passed by a 219-212 vote in the Democratic-controlled House, died in the Senate. While a well-designed cap-and-trade system theoretically could “price” carbon because the traded emissions permits would be bought and sold at a price approximating the current cost to reduce a certain amount of emissions, such an approach appears to have far less support than it did ten years ago. One of the reasons: The political bargains struck to introduce cap-and-trade systems in Europe, California, and the Northeastern states resulted in targets that were not nearly ambitious enough, and too many credits tended to be given away to powerful interest groups. That led to artificially low prices and only modest reductions in greenhouse gas emissions. Prices in cap-and-trade systems also tend to be highly volatile, robbing the system of the predictability needed for business decision-making. There are also concerns about the risk that financial players will manipulate a cap-and-trade system and siphon off most the “economic rents.” Although reforms are being built into all three systems to try to increase the permit trading price, it is unclear whether such a system in practical application can produce what is needed: firm expectations over time of a consistent, predictable and gradually-increasing carbon price sufficient to trigger steep emissions reductions.  

If we approve a carbon fee, wouldn’t countries without one have an advantage over U.S. companies?

To encourage our trading partners to price carbon and to make sure that U.S. companies would not be at a disadvantage, the United States could impose a World Trade Organization (WTO)-compliant border carbon adjustment on imports and include a credit for energy-intensive exports. This would make it in the self-interest of our trading partners to impose a similar price on carbon in their economies and keep the money for themselves rather than have their exporters pay it to the United States at our borders.