Jameson Balda, Democracy Fellow (‘25 Political Science and Public Administration)
As the world’s temperature increases by 2 degrees from 1880 levels, countries have begun to invest more heavily into green technology and renewables. While subsidies and other positive market mechanisms have been used to decrease countries emissions, countries have begun to invest more heavily in taxes and trading schemes to disincentive emissions and reliance on fossil fuels.
One type of these market mechanisms is a carbon tax, a tax levied upon companies who emit carbon dioxide emissions. Many different countries across the globe have imposed carbon taxes on companies, Canada has a $50 tax per ton of emissions, which will increase incrementally in 2030, where that will end in a tax of $170 for every ton of emissions. In one study, comparing 21 different countries that used carbon taxes to encourage companies to adopt renewables and emission-reduction technology, the researchers found that 17 counties saw massive emission reductions with the implementation of the tax.
Though carbon taxes have not always been effective, as domestic companies feeling the weight of a carbon tax can simply import goods from other companies, ones that don’t have to deal with the increased cost associated with a green energy transition. This phenomenon, often known as carbon leakages, ensures that even as domestic emissions may be reduced, international emissions remain the same. The best way to get around this, as the European Union has recently discovered, is to levy a tax on its domestic population, as well as impose an import tax on goods from other countries. The import tax, otherwise known as a Carbon Border Adjustment Mechanism (CBAM) prevents the economic incentives that create carbon leakage, as well as decreasing foreign emissions.
On the other hand, emission trading schemes, however, work to create economic incentives for some countries to pursue emission reductions, though through different methods. While a carbon tax imposes a country-wide non-exempt tax based on the number of tons of carbon companies emit, an emission trading scheme, better known as a cap and trade system, allows companies to produce emissions, but only under a certain limit. One of the best examples is Califormia’s cap and trade system, which was implemented in 2012 and places a cap on companies that emit more than 25,000 tons of carbon dioxide per year. Companies that go over have to pay a fine, or they can purchase tradable permits.
Companies that are under 25,000 tons of carbon dioxide per year are given permits for however much they reduce their emissions, they may sell those permits to companies over the limit. So if company A only emitted 10,000 tons, they would have tradable permits for 15,000 tons, which they could sell to company B, who would need the permit to excuse their 40,000 tons. This creates a carbon market, which incentives firms to decrease emissions, so they can sell their permits and make revenue.
Now the question is, could these policies work at the federal level in the United States? Researchers find differing answers to this, while a carbon tax, with a commensurate border adjustment, might reduce emissions in the US, it would drive up energy costs at a higher rate, which could result in lower corporation profits, and lower wages for employees across manufacturing sectors. Similarly, California saw increased gas and energy prices after implementing its cap and trade system, costs would often get passed onto marginalized communities, making it much more difficult to pay for everyday goods and necessities. Additionally, the current presidential administration is opposed to policies that encourage companies to invest in clean energy. Despite this, 4 bills in the last congress sessions offered versions of carbon taxes and cap and trade schemes in the United States, as policymakers on both sides of the aisle see an increasing need to address the climate crisis.
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