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How Would a Carbon Tax Work in the United States?

We already know the best way to tackle climate issues: we need to transition from high-emission fossil fuels to cleaner renewable energy sources. However, global carbon emissions are set to continue rising because of some countries not doing their part to stem the tide. How can we help prevent everyone from getting affected by this? One common method is through carbon pricing – implementing carbon taxes or cap-and-trade systems.

In this article, we will go through the definition of a carbon tax, how it could be implemented, and the many scenarios and concerns of its implementation.

What is a carbon tax?

The simplest way to force companies to address the issue of climate change is through the use of a carbon tax. This is achieved by levying a fixed fee on every ton of carbon emissions by companies or industries throughout different markets.

Globally, more than 40 governments have already adopted some form of a carbon tax with the most dramatic results seen in the UK and Sweden. For example, in the UK, emissions have fallen to their lowest level since 1890, thanks to a carbon price floor of £18 per ton of CO2.  Additionally, in Sweden, the country’s 1991 carbon tax has helped reduce emissions by 9% from 1990 to 2006.

Most experts agree that taxing emissions directly results in less costly policy changes and government activity than other approaches such as permits or limiting the production of greenhouse gasses. 

On the downside, it can be difficult for some businesses to quickly tackle rising costs and can in turn pass those costs entirely to consumers in their product’s price instead of taking responsibility themselves.

Proposed tax rates

A recent Congressional Budget Office (CBO) study shows that setting a carbon tax at $25 per metric ton on most emissions of greenhouse gasses could create net gains in the long term. After adjusting it annually by 2%, the government could potentially generate up to $1.1 trillion over 10 years.

Meanwhile, the Energy Innovation and Carbon Dividend Act of 2019, or H.R. 763, proposed an immediate tax of $15 per metric ton with an annual increase of $10. After 10 years, it’s estimated this will have generated some $2.5 trillion using the CBO’s calculations as a guide.


One of the major questions is implementation. The way this carbon tax bill has been proposed leaves us with several options. 

Ratcheted tax rates

As far as taxation goes, the main concerns Congress would have to address are the tax rate, and whether the proposed rates are enough to trigger behavioral changes. 

Another thing lawmakers must consider is whether or not to set a consistent carbon tax rate or increase it over time. Lawmakers can also consider setting up a tax rate difference between businesses that are already implementing emission reduction measures and those that don’t. Congress also needs to consider whether the goal is to keep emissions at an acceptable level or eliminate them.

Point of implementation

A further concern is where in supply chains will tax be collected? Possibilities range from levying that taxation at the point of extraction for raw materials to the point of sale for finished products and services. Implementation of carbon sequestration rebates must also be considered.

Border adjustment

Carbon leakage is another concern. This happens when American consumers choose to purchase more imported goods and services coming from nations with no carbon tax. Or when American companies transfer production to countries with no carbon tax. For these reasons, Congress may need to look into border adjustments as well.

Impact on the working class

Lastly, the risk of regressivity has many people concerned about a carbon tax. Unless there is some sort of mechanism to offset the negative impact of the tax on poorer households, any backlash against introducing a carbon tax could threaten its viability in the long term. 

Final word

Carbon taxes are not the final solution to the issue of climate change. But they will absolutely help contribute to reducing emissions on a national level by incentivizing people not to pollute as much, especially when they have alternatives on hand. 

While a carbon tax is currently gaining momentum among various levels of government and private sectors internationally, it remains to be seen how all countries will ultimately implement a nationwide policy given the lack of international consensus in this regard. 

Nonetheless, a majority of the world’s developed economies have begun adopting or considering some form of carbon pricing given its advantages over more traditional policy instruments that attempt to deter greenhouse gas emissions. If the U.S. fails to catch up and follow through with these advancements at home, it risks delaying efforts to improve its ability to mitigate effects of climate change, reduce the global competitiveness of American companies, as well as decrease the credibility of its promise to act on climate issues when needed.