An Emissions Assurance Mechanism: Adding Environmental Certainty to a U.S. Carbon Tax

Abstract

Economists have long favored a carbon tax as the most efficient policy to curb greenhouse gas emissions. One barrier to broader support for this policy option is its failure to ensure limits on emissions. Environmental groups, in particular, have expressed skepticism about carbon taxes for this failure to explicitly limit emissions. In response, policymakers have shown interest in a hybrid carbon tax that provides some assurance that emissions reduction targets will be met. To demonstrate how such a hybrid tax could work, I propose a prototype emissions assurance mechanism (EAM) that is practical, simple to implement, and easily understood. This EAM would be aimed at achieving a 45 percent reduction in energy-related carbon dioxide (CO2) emissions, relative to 2005 emissions, by 2035. This would put the United States on track for deep emissions reductions by mid-century. More specifically, the EAM would track actual emissions in each year relative to an emissions pathway. If cumulative emissions exceeded benchmarks along the pathway, then the tax rate would increase annually more rapidly at a rate established in the initial legislation. The emissions pathway is a policy choice that determines desired emission reductions; I suggest that the pathway and EAM be built into carbon tax legislation.