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The Design of a Carbon Tax

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  • Gilbert Metcalf
  • David Weisbach
Abstract
We consider the design of a tax on greenhouse gas emissions for a developed country such as the United States. We consider three sets of issues: the optimal tax base, issues relating to the rate (including the use of the revenues and rate changes over time) and trade. We show that a well-designed carbon tax can capture about 80% of U.S. emissions by taxing fewer than 3,000 taxpayers and up to almost 90% with a modest additional cost. We recommend full or partial delegation of rate setting authority to an agency to ensure that rates reflect new information about the costs of carbon emmissions and of abatement. Adjustments should be made to the income tax to ensure that a carbon tax is revenue neutral and distributionally neutral. Finally, we propose an origin-based system for trades with countries that have an adequate carbon tax. We suggest a system that imposes presumptive border tax adjustments with the ability of an individual firm to prove that a different rate should apply. The presumptive tax could be based either on average emissions for production of the item by the exporting country or by the importing country.

Suggested Citation

  • Gilbert Metcalf & David Weisbach, 2008. "The Design of a Carbon Tax," Discussion Papers Series, Department of Economics, Tufts University 0728, Department of Economics, Tufts University.
    • Handle: RePEc:tuf:tuftec:0728
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    References listed on IDEAS

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    Cited by:

    1. Alfredo M. Pereira & Rui M. Pereira, 2017. "Reducing carbon emissions in Portugal: the relative roles of fossil fuel prices, energy efficiency, and carbon taxation," Journal of Environmental Planning and Management, Taylor & Francis Journals, vol. 60(10), pages 1825-1852, October.
    2. Pereira, Alfredo & Pereira, Rui, 2016. "On the Optimal Use of Revenues from a CO2 Tax and the Importance of Labor Market Conditions," MPRA Paper 77630, University Library of Munich, Germany.
    3. Gilbert E. Metcalf, 2009. "Designing a Carbon Tax to Reduce U.S. Greenhouse Gas Emissions," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 63-83, Winter.
    4. Rui M. Pereira & Alfredo M. Pereira, 2017. "The Economic and Budgetary Impact of Climate Policy in Portugal: Carbon Taxation in a Dynamic General Equilibrium Model with Endogenous Public Sector Behavior," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(2), pages 231-259, June.
    5. Arik Levinson, 2011. "Belts and Suspenders: Interactions among Climate Policy Regulations," NBER Chapters, in: The Design and Implementation of US Climate Policy, pages 127-140, National Bureau of Economic Research, Inc.
    6. Erin T. Mansur, 2011. "Upstream versus Downstream Implementation of Climate Policy," NBER Chapters, in: The Design and Implementation of US Climate Policy, pages 179-193, National Bureau of Economic Research, Inc.
    7. Gilbert E. Metcalf, 2009. "Market-Based Policy Options to Control U.S. Greenhouse Gas Emissions," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 5-27, Spring.
    8. Alfredo Marvão Pereira & Rui M. Pereira, 2013. "Environmental Fiscal Reform and Fiscal Consolidation: The Quest for the Third Dividend in Portugal," Working Papers 114, Department of Economics, College of William and Mary.
    9. Lawrence H. Goulder & Andrew R. Schein, 2013. "Carbon Taxes Versus Cap And Trade: A Critical Review," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 4(03), pages 1-28.
    10. Li, Junkai & Ge, Shaoyun & Xu, Zhengyang & Liu, Hong & Li, Jifeng & Wang, Chengshan & Cheng, Xueying, 2023. "A network-secure peer-to-peer trading framework for electricity-carbon integrated market among local prosumers," Applied Energy, Elsevier, vol. 335(C).
    11. Gilbert E. Metcalf, 2009. "Cost Containment in Climate Change Policy: Alternative Approaches to Mitigating Price Volatility," NBER Working Papers 15125, National Bureau of Economic Research, Inc.
    12. Alfredo Marvão Pereira & Rui M. Pereira, 2014. "What is it going to take to achieve 2020 Emission Targets? Marginal abatement cost curves and the budgetary impact of CO2 taxation in Portugal (," Working Papers 105, Department of Economics, College of William and Mary.
    13. Gilbert Metcalf, 2009. "Reacting to Greenhouse Gas Emissions: A Carbon Tax to Meet Emission Targets," Discussion Papers Series, Department of Economics, Tufts University 0731, Department of Economics, Tufts University.
    14. Lawrence H. Goulder & Andrew Schein, 2013. "Carbon Taxes vs. Cap and Trade: A Critical Review," NBER Working Papers 19338, National Bureau of Economic Research, Inc.

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