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—taxes on oil, emissions of carbon dioxide generated by burning fossil fuels, and the production of other pollutants—would discourage the consumption of fossil fuels and thereby have a positive effect on the environment.
Nevertheless, each type of energy tax has potentially negative effects. 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 (known as 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 climate change.
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 consumers with low incomes. Potential safeguards could include increased federal funding of energy assistance and weatherization programs or reductions in other taxes.