Pricing Carbon

During this coming session, one of the issues that I will follow closely is the legislature’s actions addressing climate change. Last session, along with a number of other representatives, I cosponsored H.412, a bill that would establish a carbon pollution tax. You can review my description of this bill in my End of Session Report, which I posted here on June 10, 2015. Herein, I describe the economics behind putting a price on carbon emissions.

Economists agree that putting a price on carbon is the ideal way to limit the greenhouse-gas emissions that cause climate change. When people engage in activities that release carbon, they impose a cost on others. For example, when someone drives a car, it burns gasoline, contributing to global warming and imposing costs on the public. That societal cost is not built into the price of gasoline, so the driver does not take it into consideration when starting up his or her car. A price on carbon would add the missing cost to the price of gas. The higher price, reflecting the societal costs, would give people an incentive to drive less and thus emit less carbon.

There are two primary methods for the government to establish a price for carbon. First, it can establish what is called a cap and trade system. The government can set a maximum level of acceptable carbon emissions and then issue tradable permits for quantities of carbon emissions. This allows the market for such permits to determine the price of carbon. Such a system has been used effectively in another context. In the 1990s, the federal government successfully used a cap and trade system to reduce emissions of sulphur dioxide from coal-fired power plants, thus reducing the incidence and impact of acid rain.

Also, in 2008, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont implemented a cap and trade system called the Regional Greenhouse Gas Initiative. This initiative is intended to reduce the amount of carbon allowed from electricity producers, who are required to buy a credit for every metric ton of carbon they emit. In 2014, the Initiative’s cap was 91 million tons, with that cap declining by 2.5 percent each year from 2015 to 2020. It is too early to know how effective this initiative will be.

As an alternative to a cap and trade system, the government can establish a price through a tax on carbon. British Columbia, Canada has priced carbon through imposing a tax and carbon emissions have gone down with no discernible harm to the province’s economy.

H.412 would implement a system similar to that found in British Columbia. It would set a price on fuels that release carbon to more closely reflect the costs of carbon emissions to society. That would, in turn, provide incentive for consumers to reduce their use of carbon-emitting fuels. The revenues that are collected from the tax would be used to reduce other taxes and to fund energy efficiency efforts.

It is not clear whether this bill will advance out of the House Committee on Natural Resources this session. I am participating with the legislature’s climate caucus to determine how we may be able to advance this or other bills that will help address the causes of climate change. As always, I would appreciate any input on this or other issues in the legislature.