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Carbon (CO2) Emissions Tax Explained – Pros & Cons, Alternatives

It’s official: Our planet is hotter than humans have ever seen it before. In August 2019, The New York Times reported the previous July was the hottest month on record, and the hottest five years in history had all occurred since 2014. And this growing heat is bringing a host of other extreme weather along with it, such as flooding, droughts, and wildfires. It’s clearer than ever that climate change is a real, serious, and growing problem.

It’s also a complicated problem to tackle. But one essential step scientists agree on is reducing greenhouse gas emissions caused mainly by burning fossil fuels. However, consumers and businesses aren’t likely to rein in their fossil fuel use just for the good of the planet. In many places, burning coal, oil, or gas is simply the cheapest way to heat homes, generate electricity, and power industrial processes. Unless that changes, people won’t stop doing it.

This is the logic behind carbon taxes. They directly increase the cost of using fossil fuels. That encourages people, businesses, and governments to do everything they can to reduce fossil fuel use, from conserving energy at home to choosing alternative fuels. At the same time, the tax can raise money for other projects, like clean energy and climate adaptation, to help the world deal with global warming.

How Carbon Taxes Work

All fossil fuels contain carbon. When you burn them, they release this carbon in the form of carbon dioxide (CO2) and other greenhouse gases. These gases contribute to climate change and all its negative impacts, including drought, flooding, famine, damage to marine life, and the spread of tropical disease.

These problems are costly for society. In 2016, a collection of U.S. government agencies, known as the Interagency Working Group on Social Costs of Carbon, released a report estimating the total social costs of greenhouse gas emissions in 2020 will come to about $42 per metric ton of CO2, as measured in 2007 dollars. That works out to over $52 per metric ton in 2020 dollars. This cost will only rise over time as the effects of global warming accelerate.

The problem is the people paying the social cost often aren’t the same people who emit the gases. Instead, the people who bear the costs are those who suffer most from the effects of climate change: homeowners, farmers, and ultimately governments. The burden is highest for people in poor countries with tropical climates, even though wealthy nations are doing most of the damage.

A carbon tax changes this equation. It imposes the costs of greenhouse gas emissions directly on the emitters by taxing fossil fuels based on the amount of emissions they produce. By raising the cost of fossil fuels, a carbon tax gives everyone who uses them – individuals, businesses, and governments – an incentive to use less of them.

Determining Carbon Taxes

Some fossil fuels have a bigger carbon footprint than others. Since the goal of a carbon tax is to reduce emissions, a well-designed carbon tax sets the price for fossil fuels based on how much greenhouse gas they produce. This amount is typically measured in metric tons of “CO2 equivalent.” The term reflects the fact that some greenhouse gases, such as methane, have a much stronger impact on the atmosphere than CO2 itself.

Setting the right price for each metric ton of CO2 equivalent is tricky. If the tax is too low, it won’t do enough to reduce emissions. But if it’s too high, it will cause fuel prices to spike too quickly, causing a lot of economic pain for consumers and businesses. Thus, most carbon tax plans recommend a tax that starts fairly low and rises steadily over time, giving the economy time to adjust to rising fuel prices.

A 2017 report by the U.S. Treasury Department proposed a carbon tax that would start at $49 per metric ton of CO2 equivalent in 2019 – fairly close to the level the Interagency Working Group found for the social costs of greenhouse gas emissions. That tax would incrementally increase to $70 per metric ton by 2028. However, other experts consider this amount too low. A 2018 report by the United Nations’ Intergovernmental Panel on Climate Change (IPCC) found that to keep the planet’s temperature from rising by more than 1.5 degrees Celsius, a carbon tax would have to be at least $135 per metric ton – and perhaps as high as $5,500 – by the year 2030.

Currently, no country has a carbon tax this high. According to the World Bank, the country that comes closest is Sweden, with a carbon tax of $119.43 per metric ton in April 2020. A 2018 report from the Organization for Economic Cooperation and Development found that across the 42 countries that produce 80% of global emissions, the average price per metric ton on carbon (through either a carbon tax or a cap-and-trade system, discussed below) was only around 7 euros (just over $8 USD). The report concluded that’s less than one-quarter the price needed to reflect the true cost of greenhouse gas emissions to the planet.

Collecting Carbon Taxes

Another challenge in creating a carbon tax is figuring out how to collect it. There are three main ways to do it, each with its own advantages and disadvantages.

  • Downstream. This method taxes fossil fuels at the point when consumers actually use them. For instance, you can add an extra charge to consumers’ electric bills and tax gasoline at the pump. The advantage of a downstream tax is that it has the most direct impact on consumers’ behavior. The downside is the difficulty of collecting tax at all the millions of different points where fossil fuel gets used.
  • Upstream. This method taxes the producers of fossil fuels when they first ship their products out in a raw form. Crude oil is taxed at the point when it reaches the refinery, coal when it leaves the mine, and natural gas when it enters the pipeline. The biggest advantage of an upstream tax is efficiency since there are only a limited number of places you need to collect it. The downside is that it wouldn’t affect consumers directly. Although fossil fuel sellers would probably raise their prices to make up for the cost of the carbon tax, they wouldn’t necessarily do it evenly across the board. The biggest users of fossil fuels might not bear the biggest share of the cost, so they’d be less likely to cut their fossil fuel use.
  • Midstream. This method taxes fossil fuels after they leave the producer but before they reach the consumer. For example, you can tax all petroleum-based fuels at the point when the refinery ships them out. This makes it easier to tax different types of fuel – such as gasoline, diesel, and jet fuel – based on their different emission levels. However, it doesn’t affect consumers’ behavior as directly as a downstream tax, and it’s still somewhat more complicated to collect than an upstream tax.

The 2017 Treasury report argues that the easiest way to add a carbon tax to the existing U.S. tax system would be to collect it either upstream or midstream – or possibly a combination of the two. This approach would involve using tax credits to make up for fossil fuels used in ways that don’t actually release greenhouse gases. For instance, oil refineries would get a credit for any petroleum they sell to be turned into products, such as fertilizer, instead of being burned. Power plants would get a credit for any CO2 they capture and sequester underground rather than releasing it into the atmosphere.

Carbon Taxes vs. the Alternatives

Many economists and policy makers, including the authors of a 2019 report by the International Monetary Fund, argue carbon taxes are the best way for governments to reduce greenhouse gas emissions. But what other approaches can governments use, and how do they stack up against a carbon tax?

Cap-and-Trade Systems

One common alternative to a carbon tax is a cap-and-trade system, also known as carbon trading or emissions trading. This system has two parts. First, the government sets a limit, or cap, on total greenhouse gas emissions – either for a particular industry or for the economy as a whole. In most cases, this cap gets gradually lower over time.

The government then divides up this total into smaller amounts, called emissions allowances or credits, and doles them out to businesses. The amount of greenhouse gas a business can emit in a given year is the sum of all the credits it receives. If its emissions are over this limit, it can either cut them or buy some credits from another company that’s under its limit. This is the “trade” part of the system.

The U.S. successfully used a cap-and-trade system back in the 1990s to control emissions of sulfur dioxide (SO2), which causes acid rain. However, a carbon trading system would have to be much bigger – up to 100 times bigger, according to the Carbon Tax Center. In addition, it’s much harder to trap or filter out CO2 the way many businesses did with SO2 to stay within their allowances. So it’s not clear a carbon trading system would work as well as the sulfur trading system did.

Some politicians prefer cap-and-trade systems to carbon taxes because they don’t directly raise energy prices – something that tends to upset voters. However, cap-and-trade systems have a few big disadvantages compared to carbon taxes.

  • They’re Complicated. A cap-and-trade system is complex. It’s more time-consuming to set up, more complicated to administer, and harder for voters to understand. And the complexity of the system creates a lot of wiggle room for businesses to manipulate it to maximize their profits rather than minimizing their emissions.
  • Prices Are Unpredictable. Under cap-and-trade systems, energy prices tend to fluctuate even more than normal. It’s impossible to predict how much energy allowances will cost at any given point in the future because factors like the weather and the state of the economy will drive energy use up or down. Carbon taxes, by contrast, are predictable. Energy users know how much the tax is today and how much it will be next year, so they can make decisions accordingly, whether they’re buying a family car or designing a new power plant.
  • They Don’t Reduce Emissions as Much. Perhaps the biggest problem with cap-and-trade systems is that the cap, which is meant to be a ceiling on emissions, can easily become a floor. Companies who cut their emissions below the level of their allowance don’t lower the overall amount of greenhouse gas in the atmosphere. They merely create room for others to pollute more. Worse, since cap-and-trade systems often set allowances based on how high a company’s emissions already are, companies have an incentive to increase their emissions before the law goes into effect so they’ll have more credits to use or sell. With carbon taxes, the more companies cut their emissions, the more money they save.

Carbon Offsets

Global warming is a global problem. The change in Earth’s temperature depends on the total amount of greenhouse gas emitted all across the planet, not just in the U.S. Thus, it makes sense to reduce greenhouse gas production everywhere in the world, focusing on the places where it’s possible to get the biggest reduction for the smallest cost.

That’s why most cap-and-trade systems include some form of carbon offsets. These give polluters a chance to offset, or make up for, their own CO2 emissions by funding projects that reduce emissions elsewhere in the world. For example, they can fund green energy installations, such as wind farms and solar arrays, or projects that reduce deforestation. The European Union’s cap-and-trade program, called the Emissions Trading System (EU ETS), uses two types of offsets administered by the United Nations Environment Programme, and California’s cap-and-trade program includes six types of offsets.

Unfortunately, in practice, carbon offsets don’t reduce actual CO2 emissions as much as they’re supposed to. A 2008 analysis of the EU ETS by the U.S. Government Accountability Office found that the EU’s total emissions had exceeded its supposed cap, partly because so many polluters were buying offsets in other countries. And the office’s follow-up report in 2011 found that in many cases, those offsets weren’t actually reducing emissions at all. For instance, European polluters chose to offset their emissions by paying Chinese factories to destroy their stocks of HFC-23 (a.k.a. fluoroform), an extremely potent greenhouse gas. China responded by deliberately manufacturing more HFC-23 in order to destroy it.


Currently, the U.S. government spends approximately $20 billion per year on direct subsidies to the coal, oil, and natural gas industries, according to a 2017 report from Oil Change International. These subsidies make fossil fuels cheaper and encourage people to use more of them – exactly the wrong approach for lowering emissions. Getting rid of these subsidies and using the money to support renewable energy, such as wind and solar, could make green energy a cheaper alternative to fossil fuels and encourage more people to switch.

Producing greener energy is an important part of the solution to the global warming puzzle, but it’s only one part. To get global emissions down to a sustainable level, we also have to use less energy. It simply isn’t possible to ramp up production of green energy fast enough to meet our current levels of demand before climate change gets out of hand.

Subsidizing green energy gives people and businesses an incentive to change what kind of energy sources they use, but not how much they use overall. For example, making solar power cheaper than coal gives them a reason to switch from coal to solar for their electricity needs, but it doesn’t give them a reason to invest in more efficient equipment that uses less electricity in total.

Moreover, subsidies for green energy cost the taxpayers money. A carbon tax, by contrast, raises money, which the government can use for rebates to offset the higher energy prices consumers will pay.

Carbon taxes, which make fossil fuel use more costly, encourage both lower energy use and switching to renewables. Cutting fossil fuel subsidies could also raise fossil fuel prices, but not nearly as much. According to the Carbon Tax Center, the total amount Americans spend on fossil fuels each year comes to more than $1 trillion. Thus, eliminating $20 billion worth of subsidies would only raise prices by about 2%.

Fuel Efficiency Standards

Since the 1970s, the U.S. government has set energy efficiency standards for new cars, appliances, and buildings. For example, CAFE standards (or “corporate average fuel economy” standards) require auto manufacturers to maintain a certain average level of fuel economy across their whole fleet of vehicles. Like subsidies, these standards can help reduce energy use, but their effect is limited.

In theory, these standards can reduce the amount of gasoline Americans use for each mile they drive, but they can’t reduce the total number of miles driven. In fact, they could even increase it because if cars use less gas, people can afford to drive more on the same amount of fuel. This rebound effect reduces how much increased efficiency actually cuts fossil fuel use and emissions.

A carbon tax, by contrast, encourages people both to choose fuel-efficient cars and to drive them less. By making gas more expensive, it gives drivers an incentive to use less of it in any way they can. And since the price of gasoline affects the price of all types of goods that have to be shipped, it also encourages consumers to make other decisions that reduce fossil fuel use, such as choosing locally grown food.

Moreover, carbon taxes increase the cost of other types of fossil fuels besides gasoline. This encourages consumers, businesses, and governments to reduce energy use in other areas beyond just transportation, such as constructing more efficient buildings.

The Clean Air Act

A final approach to reducing greenhouse gas emissions is to regulate CO2 and other greenhouse gases as pollutants under the Clean Air Act. That way, the government can simply set limits on how much CO2 power plants and other industries can produce, with fines for those who go over the limit.

However, regulating carbon this way is more complex than taxing it. To regulate carbon as a pollutant, the government would have to:

  • Set limits on how much carbon every single power plant, factory, and other emitter in the country can produce
  • Measure emissions from all these polluters to make sure they stayed within the limits
  • Impose fines on those who went over the limits
  • Deal with the lawsuits that would almost certainly occur over these fines

A carbon tax is much simpler. Once the government has set its price for carbon and figured out how to collect it, the market can take care of the rest.

Current Examples of Carbon Taxes

According to The World Bank, as of 2019, there are 40 countries and more than 20 cities, states, and provinces around the world using some kind of carbon pricing scheme – either a carbon tax or a cap-and-trade system. These carbon pricing systems cover about 13% of all the greenhouse gases emitted worldwide. A separate 2018 World Bank report adds that 88 countries around the world are either planning or considering a carbon tax to meet their goals under the 2016 Paris Agreement on climate.

Countries that have adopted carbon taxes include:

  • Sweden. Enacted in 1991, Sweden’s carbon tax is a downstream tax on consumers and businesses. As of July 2020, consumers pay a tax of 1,190 Swedish krona (about $134 USD) per metric ton for the fossil fuels they consume. However, the tax doesn’t apply to fuel used for electricity, which is taxed separately. Renewable fuels – such as ethanol, biofuels, and waste burned for fuel – are also exempt from the tax. This led to a big boom in the biofuel industry in Sweden. In the first 27 years since the carbon tax became law, Sweden’s total greenhouse gas emissions fell by 26%, even as the country’s economy grew by 78%.
  • Ireland. As a member of the European Union, Ireland is part of the EU ETS. However, it also enacted its own separate tax on carbon in 2010. The tax started at 10 euros (about $11.60 USD) per metric ton and rose to 26 euros (about $30.20 USD) by 2020. According to the Carbon Tax Center, it raises about 400 million euros ($464.6448.5 million USD) in revenue each year and has enabled Ireland to reduce its budget deficit without raising income taxes. However, so far, the tax has made only a relatively small dent in Ireland’s total greenhouse gas emissions. In June 2019, reported that the Irish government planned to increase the carbon tax to 80 euros ($92.90 USD) by 2030 to meet its targets for overall emissions.
  • Australia. In 2012, Australia enacted a carbon tax of $23 Australian (about $19.60 USD at the time) per metric ton. By 2013, The Age reported, coal burning in Australia had declined, renewable energy had soared, and emissions from power plants had fallen by 5.4%. However, despite this success, the tax was unpopular because it raised people’s energy bills. The government repealed the tax in 2014, and within a year, The Guardian reported that coal use and greenhouse gas emissions were on the rise again. Today, Australia has a modest cap-and-trade program instead, and Climate Action Tracker says it’s likely to miss its targets for cutting emissions.
  • Britain. Great Britain enacted its carbon tax in 2013. Since the country was then part of the EU ETS, its carbon tax was technically a “price floor” – that is, a guarantee that the price for carbon emissions would never fall below a minimum level. For the year 2016, this rate was 18 pounds (about $25 USD at that time) per metric ton. The tax has driven utilities away from coal toward lower-carbon natural gas and caused the nation’s greenhouse gas emissions to drop sharply. By 2016, CarbonBrief reported, they’d fallen to their lowest level since 1894. However, Britain separated from the EU in January 2020, and it’s scheduled to leave the EU ETS at the end of the year. The country’s 2020 Finance Bill will include a proposal for a new British carbon tax, but it’s not clear yet how much it will be.
  • Canada. Passed in 2018, Canada’s carbon tax is one of the most ambitious in the world. Carbon emissions prices started at $10 Canadian (about $7.50 USD) per metric ton and are scheduled to increase by $10 each year, reaching $50 Canadian ($37 USD) by 2022. Individual provinces can opt out of this national tax by developing their own carbon pricing schemes as long as they meet or exceed this price floor for carbon. For example, British Columbia already had its own steeper carbon tax, enacted in 2008. Most of the money from Canada’s carbon tax gets returned to the taxpayers through tax rebates, which the government says more than offset higher energy prices for the majority of Canadians. However, Canada’s Conservative party has pledged to repeal the carbon tax if it gains power in the next national election.
  • Chile. In 2014, Chile became the first nation in South America to enact a carbon tax. Its tax, equivalent to about $5 in U.S. dollars per metric ton, targets power plants and large factories, which produce about 55% of the country’s emissions. It passed as part of a larger tax bill that also raised the corporate tax and didn’t go into effect until 2018. An analysis published that year in Latin American Research Review found that this small carbon tax would be “wholly ineffective in reducing emissions” and would serve no purpose except to raise revenue.

Advantages of a Carbon Tax

A carbon tax can have big advantages for both the environment and the economy.

1. Lower Emissions

A carbon tax encourages both individuals and businesses to cut their carbon emissions any way they can. Because it makes burning fossil fuels more expensive, it drives people toward all the possible alternatives: conserving energy, using more efficient equipment, and switching to lower-carbon energy sources. The bigger the tax is, the more it can reduce emissions, as the examples of Great Britain and Sweden demonstrate.

2. Other Environmental Benefits

Greenhouse gas emissions aren’t the only way fossil fuels harm the environment. There’s also harmful particulate pollution and water pollution from strip mines. By discouraging fossil fuel use, a carbon tax can improve air and water quality and even reduce the amount of traffic on roadways.

3. Reduced Dependence on Foreign Oil

According to the Energy Information Administration, the U.S. is much less dependent on foreign oil than it used to be. However, we still import about 530,000 barrels of oil each day – about 2.7% of our total consumption. Switching from fossil fuels to renewable energy sources could eliminate the need for foreign oil and free us from entanglements in the Middle East.

4. Flexibility

A carbon tax works with the free market rather than against it. The government doesn’t tell businesses how to cut their carbon emissions or even how much they need to cut them. It simply raises the price of fossil fuels to cover the cost of the harm they do, allowing businesses and consumers to find their own cost-effective solutions.

5. Increased Tax Revenue

A carbon tax could raise a lot of money. The 2017 Treasury report calculated that a tax of $49 per metric ton of CO2 equivalent would raise $2.2 trillion over 10 years. The government could use this money to reduce other taxes or finance more projects that help combat climate change. Or it could simply return the money to the American people through a carbon dividend like the tax rebate offered in Canada, which would offset the higher energy costs the tax would create.

6. Boosts Economic Growth

A well-designed carbon tax can be good for the economy. A 2016 paper from the Wharton School at the University of Pennsylvania outlines the benefits of a revenue-neutral carbon tax, which distributes the money directly to U.S. citizens. Although families would have to spend more on energy, the majority of families – particularly lower-income families – would get more back from the carbon dividend than they would pay. Thus, the carbon dividend would put money in the hands of those who are most likely to spend it, boosting the economy. It would also help the economy indirectly by reducing the economic harms caused by climate change.

Drawbacks of a Carbon Tax

Opponents of carbon taxes argue they’re harmful to consumers and businesses and don’t offer a full solution to global warming. These concerns are valid. But there are ways to address them.

1. It’s Regressive

A carbon tax increases energy costs for consumers. The 2017 Treasury report calculated that a $49-per-ton carbon tax would raise the cost of gasoline and home heating oil by about 12%, electricity by 17%, and natural gas by 27%. This added cost would fall hardest on low-income households, which spend a larger percentage of their budget on gas and utility bills.

Rising energy costs would also indirectly drive up prices for other goods and services. For instance, higher gas prices would make public transportation more expensive. They would also make it more expensive to ship food and other consumer goods across the country, raising prices across the entire retail sector. Again, these price hikes would also have a disproportionate impact on low-income consumers.

There are a couple of ways to reduce the impact of this problem. One is to phase in the carbon tax slowly so prices rise gradually instead of all at once. This would give consumers and businesses more time to switch to more fuel-efficient vehicles and invest in equipment to make their homes energy efficient. However, even a gradual increase in energy prices could be burdensome for families already struggling to make ends meet.

That’s why many advocates of carbon taxes recommend making them revenue-neutral: returning the money they raise to the taxpayers instead of putting it into the general budget. The government could do this by reducing other taxes, increasing the earned income tax credit, or directly paying a carbon dividend to every American household.

Doing this could make a carbon tax progressive rather than regressive. Most of the revenue from the carbon tax would come from wealthier Americans and businesses, who tend to use more energy. Thus, if the government divided up the money and paid out an equal share to every American, lower-income Americans would end up with more money in their pockets. A 2014 paper by Regional Economic Models Inc. (REMI) calculates that for these Americans, the extra cash would be enough to cover the higher cost of energy and then some.

2. It Hurts Certain Industries & Regions

Even if a carbon tax doesn’t hurt the average consumer, it certainly hurts workers in specific industries that depend on fossil fuels. According to the REMI paper, a revenue-neutral carbon tax would add 2.1 million jobs to the U.S. economy as a whole, but some industries – particularly mining, manufacturing, and transportation – would lose jobs. Job losses would be heaviest in the West South Central states: Texas, Oklahoma, Arkansas, and Louisiana.

Naturally, any carbon tax that successfully reduces fossil fuel use will also mean fewer jobs for people who produce and distribute fossil fuels. However, it will also open up opportunities in other areas, such as renewable energy. Phasing in the tax gradually will give energy companies the opportunity to expand into these areas and retrain and redeploy their workers – for example, by putting coal miners to work building solar arrays.

The government could also use some of the money from the carbon tax to help with the retraining process or compensate affected workers. However, using the money for this purpose would reduce the amount that could be returned directly to taxpayers.

3. It Isn’t Enough

Some scientists who advocate for reducing carbon emissions argue that a carbon tax won’t lower emissions enough on its own. David Goldstein, co-director of the Natural Resources Defense Council’s Energy Program, makes this argument in a post at GreenBiz. He points out that to meet the IPCC’s target for global average temperature, the U.S. would have to reduce its total fossil fuel use by 85%. In order to reduce energy demand that much, he says, a carbon tax would have to increase prices to 44 times their current level since it takes significant price increases to get people to cut their energy use.

Goldstein admits the drop in fossil fuel consumption could come partly from efficiency and increased use of renewable energy rather than lower energy use. However, he says that even then, the price of fossil fuels would have to rise to about five times the current level. Electricity prices would be about $0.50 per kilowatt hour, and gas would cost $12 a gallon. These prices, he argues, would be “damaging to the economy and potentially devastating to the poor.”

The Carbon Tax Center points out a couple of problems with this argument. First, prices would not rise to these levels overnight. Instead, the tax would phase in gradually, giving consumers and businesses time to invest in energy efficiency or switch to renewable fuels. Second, a revenue-neutral carbon tax would return money to the poor, more than making up for the added energy costs they would pay.

However, the Carbon Tax Center also stresses that carbon taxes don’t have to be the only solution. Instead, they should be combined with other approaches: ending subsidies for fossil fuels, creating subsidies for renewable energy, and increasing efficiency standards. Tackling carbon emissions on multiple fronts gives us the best possible chance of reducing them enough to avoid a climate catastrophe.

Chances for a U.S. Carbon Tax

Previous attempts to pass a carbon tax in the U.S. haven’t been very successful. In 1993, President Bill Clinton proposed an energy tax that made it through the House of Representatives but died in the Senate. And in November 2018, voters in Washington state – one of the most progressive and eco-conscious states in the country – defeated a ballot initiative to impose a statewide carbon tax of $15 per metric ton.

There are several factors working against carbon taxes in the political sphere. The first is the word “tax” itself, which automatically upsets many voters – one reason many lawmakers prefer cap-and-trade systems. The second is that carbon taxes would, by design, drive up energy costs, which many voters already consider too high.

And finally, as sources from CNN to Britain’s The Guardian to Pew Research have pointed out, the Republican party has historically opposed any action to control climate change. Indeed, many Republicans, including President Donald Trump, continue to deny that global warming is a real problem.

There’s some evidence that public opinion on this final point is shifting. A June 2019 Reuters poll showed 70% of Americans, including a majority of Republicans, say they want the U.S. to take “aggressive” action on climate change. However, opposition to taxes remains a major barrier. In that same poll, only one-third of respondents said they would be willing to pay an extra $100 per year in taxes toward that end.

One way to get past this barrier is to craft a revenue-neutral carbon tax that returns the money to the taxpayers. The Climate Leadership Council, an industry-led group, says its proposed carbon dividends plan, which would return the proceeds of a carbon tax directly to the people, has the support of 66% of Americans, including 53% of Republicans.

As of July 2020, several carbon tax bills that distribute most or all their revenue to taxpayers are up for consideration in the House and Senate. They include:

  • SWAP Act. Reps. Francis Rooney, R-Fla., and Dan Lipinski, D-Ill., introduced the Stemming Warming and Augmenting Pay (SWAP) Act in the House in July 2019. It taxes fossil fuel producers and large industrial emitters $30 per ton of CO2 equivalent with an increase of 5% plus inflation each year. The sponsors say this would cut greenhouse gas emissions 42% by 2030. Most of the money would go to reduce payroll taxes and offset higher energy costs for low-income families.
  • Raise Wages, Cut Carbon Act. Rooney and Lipinski also offered an alternative proposal to the SWAP Act: the Raise Wages, Cut Carbon Act of 2019. This carbon tax starts out higher at $40 per ton but rises slower at only 2.5% plus inflation each year. It’s an upstream tax that would tax all fossil fuels at the point when they enter the U.S. economy. The revenue would go toward cutting payroll taxes and supplementing Social Security benefits.
  • Energy Innovation and Carbon Dividend Act. The carbon tax bill with the most support in the House is the Energy Innovation and Carbon Dividend Act. Introduced by Rep. Theodore Deutch, D-Fla., in 2019, it has 81 cosponsors as of July 2020. This revenue-neutral tax would start out at $15 and rise by $10 each year, with all the money collected going into a Carbon Dividend Trust Fund. The costs of the program itself would come out of this fund, and all the rest would be returned to taxpayers as a dividend. The nonpartisan Citizens’ Climate Lobby estimates the bill would reduce U.S. emissions by at least 40% over 12 years while creating 2.1 million new jobs.
  • Climate Action Rebate Act. Sens. Chris Coons, D-Del., and Dianne Feinstein, D-Calif., introduced the Climate Action Rebate Act of 2019 in the Senate, with Rep. Jimmy Panetta, D-Calif., proposing a matching bill in the House. It includes a carbon tax of $15 per metric ton that would increase at a rate tied to U.S. emissions. The sponsors say it could reduce greenhouse gas emissions 55% by 2030 and 100% by 2050. Most of the money it raises would go to a monthly dividend for low-income and middle-income Americans, with the rest going toward clean energy investments. Although this bill has no Republican sponsors yet, Coons told The Hill he believes it could gain Republican support by either eliminating other regulations on fossil fuel use or spending more money on new energy technologies.

These bills are likely to face some steep opposition in Congress. According to The Hill, the House condemned carbon taxes as “detrimental to the United States economy.” And even if one of the bills makes it through Congress, President Trump is unlikely to sign it. However, several Democratic presidential candidates have endorsed the idea of a carbon tax, so if a Democrat unseats President Trump in 2020, there’s a good chance it could become law.

Final Word

How a carbon tax would affect you personally depends on how the law is constructed. Any carbon tax would increase the amount you pay for energy since that’s the whole point of this type of tax. You’d pay more for electricity, more at the gas pump, and more for oil or gas to heat your home. And other products that require energy to make and ship, such as food and manufactured goods, would cost more as well.

However, if the carbon tax is revenue-neutral, you’d also be getting some money back – either as a dividend or in tax cuts. If your income puts you in the middle class or lower, these rebates would probably more than cover the extra cost of fuel. Plus, you’d be able to reduce the amount you pay in carbon tax by taking steps to cut your energy use, such as driving less, driving more efficiently, or saving energy at home. So with a little effort, you could easily come out ahead. And even more importantly, you’d be leaving a safe and livable planet to your children and grandchildren.

If you’re interested in making this happen, there are several things you can do to help. Sign up for mailings from the Carbon Tax Center and the Citizens Climate Lobby to stay informed. Talk about carbon taxes with others and donate to groups that support them. And as always, call and write your legislators to urge them to back carbon tax bills.

Would you support a revenue-neutral carbon tax? Why or why not?

Amy Livingston is a freelance writer who can actually answer yes to the question, "And from that you make a living?" She has written about personal finance and shopping strategies for a variety of publications, including,, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.