On Carbon Taxes and Investment

JEI Working Paper 2: On Carbon Taxes and Investment

Mimi Reichenbach
Yale University
March 2015

In 2013, 36 gigatons of carbon dioxide were released into the atmosphere by polluters; the top three emitting countries were China (28%), the United States (14%), and India (7%). These top three polluters, responsible for 49% of the global carbon dioxide emitted annually, do not currently have national carbon pricing policies. This paper analyzes carbon-pricing plans that the United States could potentially use to decrease emissions; the recommendation is for a graduated revenue-neutral carbon tax, a gas tax, and the re-channeling of current taxpayer subsidies for fossil fuel exploration and production to investments in clean technology.

At the current annual rate of emissions, if an energy transition from a fossil-fuel-based economy to one of clean technology does not occur within the next sixteen years, the atmospheric temperature will certainly surpass a 2°C increase. A carbon tax is an essential step for avoiding the detrimental effects associated with climate change. A rate of $25–$50 per ton of CO2 for a revenue-neutral carbon tax would decrease emissions and provide private investors with incentives to pursue clean technology investments, while also decreasing income and business taxes for U.S. taxpayers. Currently, low gasoline prices present an opportunity to implement a higher rate of carbon taxation for gasoline because of the inelasticity of gasoline sales; a $0.75–$1.00 tax per gallon at the pump would correspond to  $75–$100 per ton of CO2. A final recommendation is that U.S. taxpayer money currently funding fossil fuel subsidies (specifically for production and exploration, totaling $5 billion annually) be instead directed to clean technology investments.

Editor’s Note: Mimi Reichenbach is also a co-author of the recent CO2 Tax and Refund for New York State paper from the Network for Sustainable Financial Markets.