Energy and Environmental Taxes

On this page: Taxation

Background

Concerns about the price of energy, dependence on imported energy, and the contribution of fossil fuels to climate change have resulted in increasing interest in taxes on energy consumption. Energy taxes—including levies on domestic or imported oil, emissions of carbon dioxide generated by burning fossil fuels, and the production of other pollutants—would discourage their consumption and could have a positive effect on the environment.

Nevertheless each type of energy tax has potential negative effects (see Chapter 10, Utilities: Telecommunications, Energy, and Other Services, for further discussion of utilities). Carbon taxes or other levies could generate revenue that would allow reduction of other, more distorting taxes.

All of these taxes are borne by consumers and may be regressive. Some energy taxes also have different effects due to urban-rural and regional variance (for example, heating-oil taxes hurt people in the Northeast).

Energy and Environmental Taxes: Policy

Carbon and energy taxes

An auction of pollution or carbon-emission permits (that is, a “cap-and-trade” program), a new tax on carbon emissions, or some other form of energy tax may be appropriate to raise revenues, promote energy conservation, and reduce global warming.

Compensation

In this policy: FederalStateTaxationcarbon taxlow incomeenergy tax

Policies such as a carbon tax or a cap-and-trade system that would increase energy-related and other prices must include measures to compensate for regional differences in energy costs and must adequately protect low-income consumers. Potential safeguards could include increased federal funding of energy assistance and weatherization programs or reductions in other taxes.