Center for American Progress

A Carbon Tax and the Clean Power Plan Would Work Together to Cut Greenhouse Gas Emissions
A wind turbine is seen at the First Wind project in Sheffield, Vermont. (AP/Toby Talbot)
A wind turbine is seen at the First Wind project in Sheffield, Vermont. (AP/Toby Talbot)

In recent months, several members of Congress have introduced legislation to assess a tax on carbon pollution, and even some conservatives have expressed support for such a tax. While these proposals differ in important ways, they reflect a common understanding: To achieve the long-term, economy-wide emissions reductions needed to avert the worst effects of climate change, both the U.S. and global marketplaces must reflect the cost of carbon emissions.

However, when presented with a new carbon tax proposal, many climate policy observers ask: If the United States enacts a carbon tax, should Congress repeal the Clean Power Plan—the Environmental Protection Agency’s, or EPA’s, forthcoming rule to cut carbon pollution from power plants?

The answer to this question is a resounding no. A carbon tax should not come at the expense of the Clean Power Plan, which promises to cut carbon pollution from the power sector by 30 percent below 2005 levels by 2030. In fact, the Clean Power Plan and a potential carbon tax are mutually reinforcing rather than mutually exclusive. The Clean Power Plan will guarantee emissions reductions from the largest uncontrolled source of carbon pollution in the United States and reduce the power sector’s cost of complying with a future carbon tax. Meanwhile, a carbon tax will elicit additional pollution reductions from all sectors of the U.S. economy.

Regulations and the market work best together

History has shown that market mechanisms and regulatory policies often work best in combination with one another to achieve environmental goals. The two examples from environmental law described below show how tax policy and a regulatory framework can work hand-in-hand to cut pollution, improve economic efficiency, and ensure a smooth transition to less-polluting processes.

Ozone-depleting chemicals

The U.S. approach to reducing the use of ozone-depleting chemicals, or ODCs, provides a good example of how a tax can complement regulation to cut pollution.

In 1974, scientists found that the growing use of chlorofluorocarbons, or CFCs—which were popular in refrigeration and as aerosol propellants—were depleting the earth’s protective ozone layer. The United States became the first nation to ban CFCs in nonessential products in 1978. In 1988, the United States ratified the Montreal Protocol, which committed signatories to cut CFC consumption by half. The following year, Congress chose to enact a tax on all ODCs, including CFCs, in order to send a strong market signal and accelerate progress toward reducing the use of ODCs in all sectors of the economy.

In a review of the ODC program, the World Resources Institute concluded that:

Clearly, the combination [of regulations and the tax] has been extremely effective, and there is some reason to believe that the tax on ozone-depleting chemicals lowered production more than regulatory caps alone would have. In 1990, the year the tax was imposed, total CFC consumption dropped to 440 million pounds down from 700 million pounds in 1989.

Meanwhile, the regulatory caps prevented the tax from becoming “another cost of business to be passed on to purchasers,” forcing a market shift toward alternative chemicals. In effect, the combination of market and regulatory mechanisms eliminated the use of ODCs at a lower cost than predicted. Moreover, this combination approach helped reduce concerns about competitiveness since all parties using ODCs, including importers, were affected.

Greenhouse gas emissions from cars and trucks

The history of vehicle greenhouse-gas tailpipe standards demonstrates the importance of using regulations to drive emissions reductions when a tax is not sufficient to change market behavior.

Congress first enacted a federal excise tax on gasoline and other motor vehicle fuels in 1932. States assess their own excises taxes as well. The combined national average of state and federal excise taxes on gasoline is 48.85 cents per gallon.

Gasoline demand is relatively inelastic—meaning it would take a significant increase in the gasoline tax to change consumer behavior and reduce vehicle pollution. The gasoline tax was not created for that purpose, so it is not surprising that the tax has not been sufficient to drive down emissions of greenhouse gases from vehicle tailpipes. In fact, carbon pollution from the transportation sector increased by 53 percent between 1973 and 2007, the year when emissions peaked. Raising the tax to the levels needed to affect the habits of U.S. drivers would likely face insurmountable political odds.

Fortunately, simultaneous regulation will be effective at cutting pollution from vehicles. In 2010, the Obama administration issued tailpipe standards for light-duty cars and trucks through model year 2025. These standards will reduce greenhouse gas emissions by 6 billion metric tons over the lifetimes of the vehicles sold while also saving consumers more than $1.7 trillion at the gasoline pump. In 2011, the Obama administration also issued tailpipe standards for model year 2014 to 2018 medium- and heavy-duty vehicles that will reduce greenhouse gas emissions by 270 million metric tons. President Barack Obama plansto issue the next phase of these standards for new models of medium- and heavy-duty vehicles by early 2016.

Combining market and regulatory approaches to cut carbon pollution

The Clean Power Plan and a carbon tax could work together to reinforce and maximize emissions reductions, as each policy would strengthen the other.

The Clean Power Plan guarantees that the United States will achieve meaningful reductions from the largest uncontrolled source of carbon pollution—power plants—by 2030. In order to prevent the worst effects of climate change, the United States needs to make deeper pollution cuts from all sectors of the economy. A regulatory approach that addresses the unique challenges of each sector would be time consuming and difficult. A complementary carbon tax would be a more efficient approach to obtaining needed pollution reductions.

At the same time, the regulation-and-tax approach would not overburden the power sector. On the contrary, the Clean Power Plan would actually reduce the economic burden of any potential carbon tax on the power sector. A carbon tax would simply be a fee on each ton of carbon emitted. Thus, the more that power plants increase their efficiency and lower emissions under the Clean Power Plan, the lighter the burden of the carbon tax. For example, under the proposed Clean Power Plan, the state of Virginia would reduce the carbon intensity of its electric power generation from 1,302 pounds to 810 pounds of carbon per megawatt hour. With a lower-carbon electricity mix, Virginia’s electric power sector would pay less in carbon taxes in direct proportion to the reductions achieved under the Clean Power Plan.

Yet, a carbon tax in isolation is a risky proposition, as a carbon tax in itself does not cap emissions. Instead, the structure and size of the tax, as well as any exemptions, determine how effective it will be at reducing emissions. If the tax is too low, it may not send a price signal strong enough to influence economic decisions and reduce emissions—as is the case with the gasoline tax and tailpipe emissions. Moreover, given the current state of U.S. politics, a carbon tax could take some time to enact and would probably start at a very low rate. With no regulation of any kind reinforcing the tax, the United States might find itself unable to cut carbon pollution to desirable levels.

The Clean Power Plan, on the other hand, will ensure that the United States at least achieves meaningful reductions from the largest uncontrolled source of carbon pollution, the power sector—both in the run-up to enactment of a carbon tax and in the event that a carbon tax fails. In fact, as with the ODC tax, the Clean Power Plan may even ensure the success of the carbon tax, resulting in an accelerated transition to a low-carbon future while acting as an important backstop once the tax is in place.

Finally, the powerful combination of the Clean Power Plan and a carbon tax would reassure potential investors in new energy technologies across all sectors that a low-carbon economy is not only a certainty but also guaranteed to happen expeditiously. Together they would signal to businesses that the time has come to switch to low- and zero-carbon energy sources, such as solar and wind power, and invest in the development of advanced technologies, such as carbon sequestration.

Policymakers should not think of a carbon tax and the Clean Power Plan as an either-or proposition. Instead, they should consider both as critical complementary tools needed to respond to the growing climate crisis.

Alison Cassady is Director of Domestic Energy Policy at the Center for American Progress. Alexandra Thornton is Senior Director of Tax Policy at the Center for American Progress. The authors acknowledge the contributions of Ben Bovarnick and Myriam Alexander-Kearns to this column.

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Alison Cassady

Managing Director

Alexandra Thornton

Senior Director, Financial Regulation