Frequently Asked Questions

Will the tax levied on carbon simply be passed along to the consumer? Is there a way to ensure that the polluters pay the costs?

A carbon tax does ensure that those responsible for pollution pay the costs associated with it. Unfortunately, some of those costs must be borne by those who consume energy. Excessive energy consumption is often a by-product of inefficient appliances or improperly insulated homes. Higher energy prices, though a burden for many (especially low-income consumers), will ultimately benefit consumers and the state’s economy. By effectively raising the price of energy as little as a penny on the dollar, consumers finally have the necessary incentive to bring about efficiency improvements in their businesses and homes – improvements that often pay for themselves in a very short period of time. In the short run, consumers will pay higher prices for energy, but it’s a cost which they will recoup through the tax-shifting effects of the proposed legislation. However, in the long run, consumers will not only benefit from lowered consumption and/or payroll taxes but will also see a reduction in their overall energy bills as their demand for energy is driven down by the efficiency improvements they make.

What are the drawbacks of a carbon-taxing system?

Most visibly, that a carbon tax only appears to discourage carbon dioxide emissions and not the emissions of other dangerous greenhouse gases, such as sulfur dioxide, nitrogen oxide, and mercury. Furthermore, a carbon tax, which is imposed on the carbon content of a fuel prior to combustion (i.e., on an input basis), offers little control over the ultimate percent reductions in carbon dioxide emissions. Therefore, a carbon tax is a relatively blunt tool in terms of achieving specific levels of emissions reductions. However, adjustments can be made to this effect by changing the level of the tax assessed. A carbon tax simply makes it more expensive to use dirtier fuels, thereby increasing the relative desirability of cleaner fuels. In addition, environmental taxes can be regressive if they are not coupled with tax credits for low income and elderly individuals. Energy intensive industries will also carry the heaviest burden under environmental taxing structures, so tax credits should be considered to allow for transition costs.

What are the advantages of a carbon-taxing system?

First and foremost, a carbon tax would bring about a reduction in the use of fossil fuels in electricity generation and other manufacturing processes. Such a reduction would have a noticeable effect on our quality of life. Fewer greenhouse gas emissions means less smog, less acid rain, less dangerous mercury saturating the ground and wildlife, and an overall improvement in the quality of our air and water. Any reduction in these emissions will also bring about a reduction in the health-related illnesses and costs associated with these emissions. As our air clears, the number of cases of respiratory problems, such as asthma, bronchitis, and other deadly diseases, will decrease, as will the amount that we spend on treating these problems.

Furthermore, a carbon tax encourages the use of non-carbon-based energy sources, which are currently at a competitive disadvantage because of an outdated tax scheme that favors dirtier fossil fuels. An increase in the use of renewable energy sources is critical for America’s future, and states that develop a viable alternatives market early on, and the infrastructure to support it, will be poised to reap economic advantages in the future as other states begin their slow transition away from fossil fuels and toward the energy sources of the future. In fact, the innovation and efficiency improvements associated with renewable energy technology offer great economic potential to the states willing to support and invest in alternatives to fossil fuels.

Finally, a carbon tax generates revenue that can be reinvested in a variety of efficient ways. Revenues can be directed to energy efficiency programs, environmental cleanup programs, pollution remediation efforts, investment in green technologies and, perhaps, most interestingly, in the elimination or reduction of existing inefficient tax burdens such as various payroll and consumption taxes.

Does a carbon tax discourage job creation? Will it hurt the economy or my state’s competitive position?

High energy taxes and a viable manufacturing sector are not only compatible, but high energy prices may even spur economic growth given the innovation and efficiency improvements induced by high energy prices.

A study conducted in 1997 for the Minnesota Legislature estimated that the pollution tax being considered at the time would bring about a 5% reduction in the use of fossil fuels and that the tax-shifting proposals would help create as many as 12,000 news jobs and expand the state’s economy by $350 million. The economic gains were projected to occur as a result of increased efficiencies in the state’s tax code and the significant tax reductions to both individuals and businesses that would result from the revenues generated from the pollution tax.

However, resource taxes should be introduced gradually to avoid economic disruption. A pre-announced schedule of increasing the taxes over a period of 5 or more years would give the private sector time to adapt. And, tying pollution taxes to reductions in the rates of other taxes would make resource taxes more acceptable. The aim is to raise taxes on behaviors we want less of, such as resource depletion and pollution and reduce taxes on things we want more of, such as employment of labor.

Are the costs of pollution - and the resulting environmental harm - currently reflected in energy prices and the decisions made by energy producers?

Certain costs, such as pollution from a production process damaging to human health and the environment, are not reflected in current energy prices. In economic terms, excess pollution is a negative externality associated with the fact that polluters are not required to pay the full social cost of their pollution. Taxes are a means to correct this imbalance, charging polluters to bring their costs closer to the full social costs of their pollution. Pollution from electric power generation has a real and quantifiable cost. A pollution tax ensures that these costs are included in decisions regarding energy generation and consumption. Environmental taxes can make prices better reflect true costs, helping to ensure that those causing environmental harm pay for it.

Why should we tax carbon and not the precursors to other harmful greenhouse gases (GHGs) such as nitrogen oxide, sulfur dioxide, and mercury?

We should tax carbon because it accounts for over 50% of climate change-inducing emissions and its share of these emissions is increasing the fastest. Does this mean we shouldn’t tax other dangerous greenhouse gases? Not necessarily, but the advantage of a carbon tax is that it is easy to administer. While other GHGs such as NOx from motor fuel combustion vary in relation to such non-controllable factors as the number of cold-starts made by the vehicle, carbon dioxide emissions occur in almost direct proportion to the carbon volume in the fuels being combusted and that fuel’s relative carbon content. Therefore, a carbon tax is simpler to administer. Lower administrative costs means that more of the revenue derived from the carbon tax can be reinvested in the state’s economy through the elimination of less efficient taxes. Furthermore, many of the other GHGs that are harming our natural environment come from the combustion or evaporation of fuels such as coal, diesel, gasoline, and other fossil fuels, all of which have measurable carbon content. In this way, the carbon tax is essentially a proxy for a tax on all the dangerous pollutants that are fouling our air.

Would a carbon tax encourage nuclear power generation?

No. Although nuclear fuel is not ordinarily considered a carbon-based fuel, electricity manufactured at nuclear generators is taxed separately under the State Energy Efficiency and Pollution Reduction Act. Nuclear power generation elicits an entirely different set of environmental and human health concerns, including the risk of meltdown, water contamination, and the question of what to do with waste that will remain radioactive for as many as 10,000 years. The State Energy Efficiency and Pollution Reduction Act ensures that “clean” renewable energy sources, and not nuclear power, are encouraged and that dirty fuel sources such as fossil fuels and nuclear power are subject to a tax equivalent to at least a small measure of their full social costs.

Would a carbon tax simply encourage consumers to buy electricity from out-of-state providers?

When a customer can choose an out-of-state supplier, then an in-state tax on electricity generation could become a competitive burden. However, the State Energy Efficiency and Pollution Reduction Act ensures that energy purchased from out of state is assessed at a rate comparable to in-state energy. A discussion of strategies to counteract this competitive imbalance can be found at: http://www.aceee.org/pubs/e972.htm

Won’t raising energy prices discourage businesses from locating in my state?

It depends. Energy-intensive industries will certainly be reluctant to pay higher energy prices. But, of course, everything is relative. Businesses will also look at the energy prices they would have to pay in other states. The payroll tax deductions they will receive under the State Energy Efficiency and Pollution Reduction Act might well make higher energy prices a non-factor for these energy intensive industries, however. And, for industries and businesses that are not energy intensive, the payroll tax credits should make your state more attractive for investment. By reducing or eliminating the payroll tax, you encourage job development in your state – particularly jobs in “cleaner” sectors. This has the effect of not only improving the economy, but also the quality of life.