Getting Serious About Carbon Pricing

The impacts of climate change impose costs on society as a whole. Pricing carbon – in the form of a cap-and-trade program or a carbon tax – shifts these costs away from society to those responsible for the emissions, while providing an incentive to reduce emissions. Pricing carbon across the economy will increase the prices of goods and services in proportion to their carbon content, and so in proportion to their effect on climate change. Higher prices for carbon-intensive goods and services will encourage businesses and consumers to look for alternatives that meet their needs and have lower carbon-emission footprints. In this way, a carbon price can help the U.S. meet its near- and long-term climate goals. But a carbon price is more than a climate policy; it’s an economic policy as well. Revenues raised by a carbon price can go toward supporting other policy priorities – including reducing distortionary taxes, investing in clean energy, or returning money to households, among other options.

In Putting a Price on Carbon: A Handbook for U.S. Policymakers, WRI provides an overview of carbon pricing – the types of decisions that need to be made in designing a program (including the political decisions about the use of revenue) and the expected economic impacts of alternative approaches.

WRI examines the ways that a national price on carbon would reduce emissions across key sectors of the economy, including empirical evidence and real world case studies, in Putting a Price on Carbon: Reducing Emissions. The research examines how the incentives for emissions reductions are depicted in an influential carbon pricing study, and shows why computer models are likely to underestimate the emissions reductions potential of a carbon price.

In Putting a Price on Carbon: Ensuring Equity, WRI describes the differing effects of a carbon price on regional and socioeconomic groups across the United States. The paper shows that the revenues from a carbon price can be used to address regional disparities and ensure that unfair burdens are not imposed on households that cannot afford them. By using just a small portion of carbon pricing revenue to specifically target low-income households and coal communities, policy designers can ensure that these groups are better off under a carbon price than alternative policy pathways.

Going forward, WRI will dive deeper into the design choices and potential economic effects of carbon pricing and the associated uses of revenues. In a series of issue briefs, we will explore such topics as the level of price necessary to drive deep emissions reductions; how a carbon price can spur innovation; and evaluating the mix of carbon prices and other approaches for achieving emission targets.