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Carbon Tax in the USA

by Olivia Lai Americas Jan 26th 20225 mins
Carbon Tax in the USA

While a growing number of countries have started implementing carbon taxes or some form of carbon pricing system as a way to incentivise companies and industries to reduce greenhouse gas emissions, the topic of a carbon tax in the USA remains elusive. Earth.Org takes a look at what are some financial mechanisms currently in place in the states, and the pros and cons of introducing a national carbon tax. 

What is A Carbon Tax? 

A carbon tax is a growingly popular financial mechanism used to combat climate change by imposing a direct price on greenhouse gas emissions produced by companies and industries. By charging polluters the emissions they produce by the tonne, the tax creates an economic incentive for companies to reduce their carbon activity or invest and switch towards cleaner fuels or technologies. 

Another method of carbon pricing is a cap-and-trade system or emissions trading scheme (ETS), where governments would cap the amount of greenhouse gas emissions released into the atmosphere every year based on carbon credits. Polluters can either sell their extra allowances to others, or buy more in order to meet its high emission standards, thus creating a market for carbon. 

Today, there are at least 27 countries that have adopted a carbon tax in some shape or form, including China – the world’s biggest carbon emitter – Denmark, the European Union, Sweden, and the UK. Yet notably, the US is not among those countries nor in the process of implementing one in the near future. 

Carbon Tax in USA

Currently, there are only two subnational carbon initiatives implemented in the country, namely cap-and-trade programmes in California and Massachusetts. As the fifth largest economy in the world,  for California to adopt carbon pricing can have a significant impact on its carbon footprint and in achieving its ambitious climate goals – the state pledged to halve its emissions by 2030 compared to 2016 levels.

California’s cap-and-trade system was launched in 2013 but recent numbers show that the current carbon market has struggled to curb pollution where carbon offsets failed to reduce targeted emissions. Critics have pointed out carbon prices to be too low and not reflective of the environmental harm caused by the energy industry. Carbon credits that have been bought by businesses to offset carbon have also been undermined by rampant and prolonged wildfire seasons in California. 

A similar cap-and-trade system was introduced in Massachusetts in 2018, which covers mainly the power and energy sector. A separate programme called the Transportation and Climate Initiative, which aims to target polluting vehicles in three Northeastern states and the District of Columbia, was proposed but failed to pass in 2021

A regional cap-and-trade system, the Regional Greenhouse Gas Initiative (RGGI), is also in the works where Eastern states including Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Virginia, will participate in the reducing and trading emissions from rom electric power plants in their states. 

The Lack of National Carbon Pricing in the US

As one of the world’s biggest greenhouse gas emitters, the US needs all the tools in its shed to reduce carbon emissions and combat global warming. Following four years of environmental roll-backs under the Trump administration, including the withdrawal from the Paris Agreement, the country is playing catch up with the rest of the world in climate action. 

Within the first few months after he was sworn in office, President Joe Biden pledged to a number of significant commitments; he promised to halve carbon emissions by 2030 and hit net zero by 2050, making a huge push for renewable energy, as well as signing an executive order to make 50% of all new cars electric by the end of the decade. But any mentions of carbon pricing or a national carbon tax has been notably absent from his carbon reduction roadmap. Many experts and world leaders, including the G20, have recognised that carbon pricing should be part of any climate policy planning and action. 

But this subject has long been unpopular in the US, particularly in the context of any taxation. During the Obama administration, when the 44th US President first proposed a national carbon tax or a cap-and-trade scheme in 2016 as a way to cut carbon emissions, it was vehemently opposed by Congress. The proposal ended a non-binding measure denouncing a carbon tax by Congressional Republicans

After such a defeat, Democrats did not try again until 2021 where members attempted to introduce a carbon border tax, which charges imported goods produced in countries with weaker climate laws and regulations. This however, was largely ignored by both Republicans and the White House. 

You might also like; Carbon Tax Pros and Cons: Is Carbon Pricing the Right Policy to Implement?

Arguments For and Against a Carbon Tax in the USA

A carbon tax in the USA could be instrumental in helping the country meet its ambitious climate goals, with some arguing that it could cover as much as 98% of the country’s carbon emissions

One of the biggest criticisms against a carbon tax in the country is how policymakers can find common ground and agree to a price – especially in a time where politics are more polarised than ever – and how to take into account the social cost of carbon and its implementation. But to that argument, the nation already has a “social cost” of carbon equation, therefore determining the current social cost should not be difficult. Others have said the carbon pricing will harm international trade, yet more than 80% of their trade is with countries who already have a carbon price in place, meaning that implementing a carbon trading system would not have a major negative impact. 

However, many have argued against a carbon tax policy on the basis that it is “regressive”, noting that it hits lower-income families harder than any other groups and communities. Additionally, the burden may not be evenly regionally distributed, as some areas of the US are more energy intensive than others. For example, the tax would affect workers more in states with more energy intensive industries, such as Illinois, Ohio, Michigan, and West Virginia, while lower-energy intensive states like Rhode Island, Delaware, Hawaii, and New Hampshire, which together accounted for only 1% of total U.S. energy use in 2015, will likely be charged less. 

Impacts will be felt across communities should the country ever decide to implement any form of carbon pricing and a bump road is certainly expected. But according to the Carbon Action Tracker, a leading research group that measures government climate action, found that US climate policies remains “insufficient” and climate finance to be “critically insufficient”. For the country to meet the Paris Agreement target in ensuring global temperature rise is no more than 2C, the US needs to make even more ambitious climate policies. A carbon tax is certainly one option to go for.


About the Author

Olivia Lai

Olivia is a journalist and editor based in Hong Kong with previous experience covering politics, art and culture. She is passionate about wildlife and ocean conservation, with a keen interest in climate diplomacy. She’s also a graduate of University of Edinburgh in International Relations with a Master’s degree from The University of Hong Kong in Journalism. Olivia was the former Managing Editor at Earth.Org.

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