Most Americans recognize the connection between fossil fuel and climate change. The increase in global average temperature results in extreme weather events that are becoming more frequent and more severe – from floods to droughts and from blizzards to heat waves. These contribute to billions of dollars of damages from wildfires, crop loss, and destruction of homes and businesses, not to mention loss of human life. These effects will get much worse during our lifetimes – and are likely to be catastrophic in our children’s lifetimes – if we don’t act immediately to reduce greenhouse gases such as carbon emissions.
The question is how to reduce our reliance on coal, gas and oil, while maintaining prosperity and national security and avoiding excessive regulation. The answer is to put market forces to work by putting a price on carbon. When the price of fossil-based energy is more expensive relative to cleaner energy, businesses and households tend to switch to the less-expensive sources. Just as importantly, a higher price on fossil fuels creates incentives for investment in innovations in cleaner energy technology.
Won’t higher fossil fuel prices hurt businesses and consumers? A carefully designed policy will benefit most businesses and households by reducing overall energy costs. The monetary savings for the economy as a whole can be immediately redirected to those who can’t quickly switch to lower-carbon solutions. It is also important to weigh the costs of making an energy transition against the costs that a changing climate is already imposing on our economy.
A tax on carbon is the most efficient way to increase the price of fossil fuels relative to cleaner energy. Experts across the political spectrum have been arguing for years for this market-based solution. A carbon tax would be imposed at the points where fuel and energy are first produced, including coal, oil, and gas production and electricity generation. These large businesses have the technological capacity and the investment capital that is needed to produce cleaner energy. A carbon tax will give them the financial incentive to ramp up these investments in energy innovation.
A carbon tax should be “revenue neutral.” That means that whatever is taken from the public through taxation should be given back, in an equal amount. For businesses, this could take the form of lower corporate taxation. For households, it could take the form of lower sales, payroll, or income taxes. In this way, a self-employed carpenter, for example, who has to drive a lot, would be compensated for higher gas expenditures.
Another way to put a price on carbon is a “cap-and-trade” or “emissions trading” program. Modeled on a longstanding and successful program to reduce sulfur dioxide emissions in the US, carbon trading programs are in place in some states and nations. The state or country sets a “cap” on the total amount of carbon emissions. Large industries start out with permits to emit a certain amount of carbon. Then, companies can sell (“trade”) unused permits. In this way, an energy-efficient company can increase its profits by selling unused permits, while a less-efficient company has an incentive to adopt cleaner technology so that it won’t have to buy permits. California’s cap-and-trade program has been seen as a model of bi-partisan cooperation. Common Sense/Forward prefers a carbon tax because it involves less regulatory complexity. If a carbon tax is adopted nationally, existing programs can be merged.
Won’t this make America less competitive? Many other countries, for their own reasons, are putting a price on carbon. For countries that don’t act, a tariff is an appropriate response.
What about energy security? When Russia’s invasion of Ukraine sent gasoline prices skyrocketing, the US dipped into its strategic reserve – which is supposed to be a reserve in case we are attacked – to bring relief at the pump. Even if domestic oil production is increased, oil prices are determined in a global market. The less we depend on fuel that’s partly controlled by dictators and terror-supporting regimes, the greater our national security.