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Designing and Updating a US Carbon Tax in an Uncertain World

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  • Aldy, Joseph

    (Harvard University)

Abstract

A carbon tax provides certainty about the price of emissions, but it does so in a context characterized by uncertainty about its environmental benefits, economic costs, and international relations implications. Given current knowledge, suppose that the government sets a carbon tax schedule. In the future, a higher (lower) carbon tax could be justified by the resolution of uncertainty along the following ways: climate change turns out to be worse (better) than current projections; the economic costs of a carbon tax are lower (higher) than expected; other major economies implement more (less) ambitious carbon mitigation programs. This paper describes the design of a predictable process for updating the carbon tax in light of new information. Under this "structured discretion" approach, every five years the president would recommend an adjustment to the carbon tax based on analyses by the Environmental Protection Agency, the Department of the Treasury, and the Department of State on the environmental, economic, and diplomatic dimensions of climate policy. Similar to the expedited, streamlined consideration of regulations under the Congressional Review Act and trade deals under trade promotion authority, Congress would vote up or down on the presidential recommendation for a carbon tax adjustment, without the prospect of filibuster or amendment. This process could be synchronized with the timing of updating of nationally determined contributions under the Paris Agreement in a manner to leverage greater emissions mitigation ambition by other countries in future pledging rounds. The communication of guiding information and the latest data and analysis could serve as "forward guidance" for carbon tax adjustments, akin to the Federal Reserve Board's communication strategy.

Suggested Citation

  • Aldy, Joseph, 2017. "Designing and Updating a US Carbon Tax in an Uncertain World," Working Paper Series rwp17-001, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:rwp17-001
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    File URL: https://research.hks.harvard.edu/publications/getFile.aspx?Id=1494
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    References listed on IDEAS

    as
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    Cited by:

    1. Robert I. Harris & William A. Pizer, 2020. "Using Taxes to Meet an Emission Target," NBER Working Papers 27781, National Bureau of Economic Research, Inc.
    2. Comincioli, Nicola & Vergalli, Sergio, 2020. "Effects of Carbon Tax on Electricity Price Volatility: Empirical Evidences from the Australian Market," 2030 Agenda 305205, Fondazione Eni Enrico Mattei (FEEM).
    3. Gabriel E. Lade & C.-Y. Cynthia Lin Lawell, 2021. "The Design of Renewable Fuel Mandates and Cost Containment Mechanisms," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 79(2), pages 213-247, June.
    4. Adrien Vogt‐Schilb & Stephane Hallegatte, 2017. "Climate policies and nationally determined contributions: reconciling the needed ambition with the political economy," Wiley Interdisciplinary Reviews: Energy and Environment, Wiley Blackwell, vol. 6(6), November.
    5. Hafstead, Marc & Williams III, Roberton C., 2020. "Mechanisms to Reduce Emissions Uncertainty under a Carbon Tax," RFF Working Paper Series 20-05, Resources for the Future.
    6. Hafstead, Marc & Williams III, Roberton C., 2020. "Designing and Evaluating a US Carbon Tax Adjustment Mechanism," RFF Working Paper Series 20-04, Resources for the Future.
    7. Jihad C. Elnaboulsi & Wassim Daher & Yiğit Sağlam, 2023. "Environmental taxation, information precision, and information sharing," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(2), pages 301-341, April.
    8. Adrien Vogt‐Schilb & Stephane Hallegatte, 2017. "Climate policies and nationally determined contributions: reconciling the needed ambition with the political economy," Wiley Interdisciplinary Reviews: Energy and Environment, Wiley Blackwell, vol. 6(6), November.

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