Energy and Environmental Taxes


There is an increasing interest in taxes on energy consumption. Concerns about the price of energy, dependence on imported energy, and the contribution of fossil fuels to climate change are driving this. A tax on carbon dioxide emissions and other greenhouse gases would discourage the consumption of fossil fuels. This would have a positive effect on the environment. 

Another way to accomplish the goal of reducing emissions is called a cap-and-trade program. Such a program sets a maximum level of emissions, and companies are issued permits for emitting a certain level. Companies with lower emissions than their allotment can trade them, for a price, to others that have higher emissions than their allotment. 

Nevertheless, each type of energy tax has potentially negative effects. All these taxes are borne by consumers and place a significant burden on households with low incomes. Some proposals use the proceeds from the levy to provide a lump-sum offset to consumers. Other potential safeguards could include increased federal funding of energy assistance and weatherization programs or reductions in other taxes. Some energy taxes also have different effects due to urban-rural and regional variance. For example, heating-oil taxes hurt people who live in cold climates. 



Carbon and energy taxes

Policymakers should take action to raise revenues, promote energy conservation, and reduce climate change. Options could include an auction of pollution or carbon-emission permits (known as cap-and-trade programs), a new tax on carbon emissions, or some other form of energy tax. 


Carbon taxes or cap-and-trade systems that would increase energy-related and other prices must include measures to compensate for regional differences in energy costs and to adequately protect consumers with low incomes.