A Tax-Based Approach to Slowing Global Climate Change

In this paper, we discuss the design of carbon dioxide (CO2) taxes at the domestic and international level and the choice of taxes versus a cap-and-trade system. A strong case can be made for taxes on uncertainty, fiscal, and distributional grounds, though this critically hinges on policy specifics and how revenues are used. The efficient near-term tax is at least $5–$20 per ton of CO2 and the tax should be imposed upstream with incentives for downstream sequestration and abatement of other greenhouse gases. At the international level, a key challenge is the possibility that emissions taxes might be undermined through offsetting changes in other energy policies.