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Carbon Taxes: The Most Efficient Way to Reduce Emissions

What is a carbon tax?

A carbon tax is a tax imposed on releases of carbon dioxide (CO2), which is emitted largely through the combustion of fossil fuels used in electricity production, industrial, commercial, residential heating, and transportation. There are many ways to measure and collect a carbon tax. The tax might be imposed at a variety of stages in the production and distribution of energy. There is an argument for imposing it at the point most visible to the population at large, which would be the point of consumption such as gasoline stations and electricity bills. An administratively more efficient way of imposing the tax, however, would be to collect it at the level of production, which would reduce greatly the number of collection points.

How would a revenue neutral carbon tax be distributed?

“Revenue neutrality comes from distribution of the proceeds, which could be done in many ways. On the grounds of ease of administration and visibility, we advocate having the tax collected and distributed by an existing unit of government, either the Internal Revenue Service or the Social Security Administration. In either case, we think the principle of transparency should be observed. Funds collected should go into an identified fund and the amounts flowing in and out should be clearly visible. This flow of funds should not be included in the unified budget, so as to keep the money from being spent on general government purposes, as happened to the earlier excess of inflows over outflows in the Social Security system.”

  • George P. Shultz and Gary S. Becker. For more, click here.

Does a carbon tax have to stay constant over time?

“The tax should increase over time if the apparent severity of the climate effects is growing and, alternatively, the tax should fall over time if the severity appears to be decreasing. Finally, to equalize the present and future burdens, the carbon tax rate should rise over time approximately at the real interest rate (say, the real return on 10-year Treasurys), so that the present value of the burden would be the same to future consumers and producers as it is to present ones.”

  • George P. Shultz and Gary S. Becker. For more, click here.