Carbon Pricing 101
In the world of climate policy, we tend to throw around wonky terms and sometimes need a reminder to take a step back and explain what they mean.
One of those terms and something that can lead to real solutions in the fight against climate change is carbon pricing.
To take a step back and lay the groundwork for understanding carbon pricing, let’s talk about how carbon dioxide and other greenhouse gases contribute to climate change. When we use fuel to power our cars, hop on a plane, turn on a light, or even ride a chairlift, our actions require energy that is traditionally generated by fossil fuels (oil, gas, coal, etc). As these fossil fuels burn, they convert into energy, and carbon dioxide is released into the atmosphere.
Carbon dioxide is a greenhouse gas, which means that when it enters our atmosphere in unprecedented quantities (as it has since the industrial revolution), it absorbs infrared radiation and warms the planet. The term ‘greenhouse effect’ describes how these gases insulate the earth similar to how a traditional physical greenhouse in your backyard stays warm throughout the year.
So What is Carbon Pricing?
Carbon pricing, in short, puts a price tag on carbon emissions. It’s a successful strategy because it works in a capitalist system by charging companies and individuals a fee when their actions release carbon into the atmosphere. This encourages people to reduce their carbon output (and increase their use of renewable energy sources) to save money. Check out this infographic on why carbon pricing is a strong solution for the future.
It’s a simple yet effective idea that creates a snowball effect to encourage people to reduce their carbon emissions and move to more renewable energy sources. Over time, our society becomes less reliant on fossil fuels like oil and coal, our carbon emissions decrease, and our economy is strengthened by new investments in wind, solar, and other renewable energy sources. It’s a win-win.
As you dig deeper into this topic, you might come across the idea that carbon pricing accurately reflects the true cost of carbon. This refers to the fact that climate change is expensive—from responding to natural disasters to reinventing or rebuilding infrastructure impacted by a warming climate. We might not see those costs day to day when we heat and cool our homes or plan our next ski trip, but eventually, as taxpayers and citizens of this planet, we will need to come up with the money to respond to the consequences of climate change and of our daily habits and conveniences. Long story short, we end up paying for that cost down the road.
In 2017, the U.S. spent over $300 billion to respond to natural disasters throughout the country, including wildfires, droughts, and hurricanes. This was the most expensive year on record, and the rising cost of responding to these symptoms of climate change will continue to worsen unless we change our ways. Implementing policies like carbon pricing can potentially free up funding to respond to these natural disasters and prevent future ones rather than placing the financial burden solely on American taxpayers.
Carbon pricing pushes our economy to seek out alternatives by encouraging producers and consumers of carbon-based goods to put their money elsewhere. It facilitates a transition to a clean energy economy that is based on wind, water, and solar power rather than oil, gas, and natural resource extraction.
Renewable energy is on the rise, bringing new jobs and streams of revenue into local economies. Carbon pricing encourages this shift to a better, more sustainable future—a future with a stable climate and reduced carbon emissions.
Different Types of Carbon Pricing
Carbon pricing can be implemented at a local, state, and national level by the people we elect into office. It can look different in each location and be referred to by several different names. Here are a few:
Carbon Tax: This is a straightforward tax on fossil fuel use. An owner of an emission source, such as a car, would pay a tax based on how much fuel was used by that vehicle. People who invest in a low-emissions vehicle, for example, would save on money owed back to the government based on the amount of fossil fuels they consume. This would incentivize a transition to more climate-friendly consumer choices and potentially free up funding to respond to support other climate-friendly projects and policies.
Depending on how a carbon tax is set up, it can apply to both individuals and businesses. Policies can offer different offsets to businesses to ensure they are not hindered.
Cap and Trade (also referred to as an Emissions Trading System, or ETS): A “cap,” or max amount of carbon emissions is set per organization (a business, government, region, utility district, etc). If a business or other entity goes over the limit, they can trade with or purchase from other organizations who have not yet reached the cap. Cap and trade systems check big businesses, refineries, and power plants—the largest fossil fuel consumers—and limits overall carbon dioxide emissions in a given area.
Carbon Fee and Dividend: A steadily rising fee would be charged on the use of fossil fuels at the source, like a tax, and at the end of each month, the proceeds (minus any administrative costs) would be divided up and returned to households. This incentivizes a transition to a clean energy economy without hurting consumers.
No matter what type of emissions-reducing policy is implemented, it is important to ensure a ‘just transition’ from a fossil-fuel dependent economy to a clean energy economy. This means that as we transition to clean energy, we will inevitably restructure the jobs and livelihoods of millions of Americans. Jobs in energy extraction, for example, will likely be replaced by positions in renewable energy, electric vehicle manufacturing, and other climate-friendly industries. We need to set policies that ensure workers are re-trained and have the resources they need to make the jump to a renewable future.
Dig In and Learn More
Several states—New York, Massachusetts, Vermont, Washington, and Oregon—are considering adopting carbon pricing legislation in the near future. If you care about the future of our winters, turn your passion into purpose and speak out with your vote. Support and elect politicians who prioritize climate action– and carbon pricing– as part of their campaigns.
As always, if you want to learn more about carbon pricing and dive into the wonky details, you can find a bunch of additional resources on our policy page.