Burning fossil fuels is by far the greatest source of the greenhouse gases causing climate change. However, the full cost of fossil fuel energy is not included in the price of the fuel. We pay for that later when we deal with the consequences of global warming. Using a car to illustrate this point, “We pay for the gas, we pay for the car, and we pay for the insurance, but we don’t pay for the pollution that comes out of the tail pipe.”
There has been and continues to be a great deal of discussion around the subject of other ways to pay for that pollution. Carbon taxes and cap-and-trade are two potential solutions.
What is a carbon tax?
A carbon price is a fee on each unit of carbon dioxide (CO2) or other greenhouse gas emissions released into the atmosphere. Carbon taxes would directly establish a price on carbon in dollars per ton of emissions.
What is a cap-and-trade program?
A cap-and-trade programs limits the total quantity of emissions per year. This limit is enforced using tradable emissions permits that any emissions source must own to cover its emissions. The market for buying and selling these allowances creates the carbon price in a cap-and-trade program.
What is the difference?
“A carbon tax directly establishes a price on greenhouse gas emissions — so companies are charged a dollar amount for every ton of emissions they produce — whereas a cap-and-trade program issues a set number of emissions “allowances” each year. These allowances can be auctioned to the highest bidder, as well as traded on secondary markets, creating a carbon price.”
How does pricing carbon create a fairer playing field?
If the price of coal, oil, and gas is raised to accommodate the pollution they create, the market will be on the side of fixing that inequity. All the other energy sources that do not put CO2 into the ecosystem — solar, wind, geothermal, hydro, and nuclear — will be competitively advantaged because the fossil fuel energy will be relatively more expensive.
How will the revenue created get distributed?
Four ways have been proposed:
- The money collected should be spent in pursuit of promoting climate justice.
- The money collected should be invested in renewables.
- The money collected should be used to reduce taxes.
- The money should be given back to the people in equal shares. Doing that provides people with a regular check, reminding them that carbon is being taxed, which might additionally encourage them to lobby for an even larger tax.
Does the US have a carbon pricing system?
The United States does not have a federal carbon tax despite the fact that economists have for decades recommended that carbon dioxide and other greenhouse gases be taxed—or otherwise priced—in order to provide incentives for their reduction.
Do any states in the U.S. have a carbon pricing system?
Yes, a number of states have adopted market-based approaches to reduce greenhouse gas emissions, either independently or as part of a regional initiative.
- California has an economy-wide cap-and-trade program that covers approximately 85% of the state's greenhouse gas emissions, including power generation, industry, transportation, and buildings. The program, launched in 2013, sets a declining cap on emissions, and covered entities must obtain allowances (permits to emit) at auctions or from other entities. It is anticipated that Californians will see 287,000 new jobs and a $55 billion total economic growth as a result.
- Washington implemented a multi-sector cap-and-invest program that was signed into law in 2021 by Governor Jay Inslee. The Climate Commitment Act (CCA) sets annual emission limits for major emitters, such as oil refiners and utilities, and requires them to buy allowances at state auctions for each metric ton of their air pollution. The program started on 1/1/23 and the first emission allowance auction was held on 2/28/23. The state raised $1.82 billion from the sale of allowances in 2023, $136 million from the first auction of 2024 held in March, and $157 million from the next in June, 2024. By law, those dollars must be spent to cut pollution, create jobs and help communities respond to climate change. . It is anticipated that Washingtonians will see a 45,000 job growth and a $9.1 billion in economic output.
- Vermont passed the Global Warming Solutions Act in 2020, setting binding goals to reduce greenhouse gas pollution by requiring a 26% reduction below 2005 levels by 2025 and 80% by 2050, with a goal of net-zero emissions by that year. On May 30, 2024, Vermont became the first state to make oil and gas giants shell out billions in climate change damage by law. The Climate Superfund Law mandates high-emission corporations -- such as ExxonMobil, Shell and Chevron -- to be financially accountable for a portion of the costs of extreme weather damage in the state.. It became law without Governor Phil Scott’s signature.
- New York The Climate Change Superfund Act (CCSA) was signed into law by Governor Hochul on December 26, 2024. The law requires certain fossil fuel producers and refiners with sufficient connections to New York to pay into a state “climate Superfund” an amount commensurate with the entity’s past global greenhouse gas (“GHG”) emissions over an eighteen-year period. The New York State Department of Environmental Conservation (“NYSDEC”) will collect $75 billion from these entities over the next 25 years.A significant portion of the funds collected are reserved for the disadvantaged communities that are disproportionately impacted by the climate crisis. The funds will also be invested in climate resiliency projects like coastal resiliency, renewable energy facilities, and green infrastructure. There are legal challenges. Morehere.
New York has another piece of climate change legislation waiting for Governor Hochul’s signature: The Cap-and-Invest Program, also known as the Clean Air Initiative, was announced in early 2024. It would put a firm, declining cap on current and future emissions, using revenues from emissions allowances to fund both mitigation and adaption projects.
- Oregon launched the Climate Protection Program (CPP) in January, 2025, placing a declining cap on greenhouse gas emissions from fossil fuels. The program is designed to reduce these emissions 50% by 2035 and 90% by 2050. It also implemented the Clean Fuels Programs (CFP) in 2016 which mandates that transportation fuels get steadily less-polluting over the next decade.
- The Regional Greenhouse Gas Initiative (RGGI), established in 2005, is a cooperative cap-and-trade program covering the power sector across a group of Northeastern and Mid-Atlantic states. Member states cap emissions from power plants and participate in regional allowance auctions. Proceeds are invested in energy efficiency, renewable energy, and other clean energy programs.
-
- Current RGGI members are: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Virginia.
- Pennsylvania is waiting for a decision allowing it to join from its Supreme Court.
These state-level initiatives provide important models for climate policy in the absence of a national system, covering over a quarter of the U.S. population and a third of the national GDP.
Has a carbon tax been proposed at the US federal level?
Over the past six years, Senators Sheldon Whitehouse, Dick Durbin, & Chris Coons in the Senate and Congressmen Ted Deutch, Francis Rooney, Dan Lipinski, John Larson, Sean Patrick Maloney & Brian Fitzpatrick have all introduced bills, none of which have been passed. In addition, a proposal for a carbon tax from the Climate Leadership Council, authored by James Baker and George Schultz, has been distributed.
UPDATE
A House bill gutting a great many IRA provisions went to the Senate in June.
