Book Review: “Paying for Pollution: Why a Carbon Tax is Good for America”

Is there a “middle way” to effective climate policy? A policy that makes sense regardless of whether you’re panicking over mass extinction or not quite sure the climate threat is serious? A policy whose cost-effectiveness[1] predominates over other policies so strongly that it appeals to both small government conservatives as well as environmental activists?

In his new book, “Paying for Pollution,” economics professor Gilbert E. Metcalf lucidly demonstrates why a well-designed carbon tax is that middle path. And, he shows why there are no good alternatives if we are serious about curbing our growing exposure to climate risk.

Prof. Gilbert E. Metcalf, Tufts University.

Metcalf certainly knows the features and pitfalls of the carbon pricing terrain. For two decades, he has focused on the role of tax policy to correct market failures. (A decade ago, after hearing his testimony encouraging the House Ways & Means Committee to propose a simple carbon tax or to simplify the behemoth cap-trade-offset bill emerging from the Energy & Commerce Committee, I had to resist the urge to stand up and applaud.) And he’s served in government, as Deputy Assistant Secretary for Environment and Energy at the U.S. Treasury from 2011-12.

Metcalf opens his book with a bird’s eye view of climate science, which through an economic lens, is telling us that we face serious and growing climate risk. That risk comes in the form of “known unknowns” such as more frequent and more damaging events like storms, floods, droughts and wildfires as well as “unknown unknowns” such as rapid methane release from Arctic permafrost and ocean clathrates. By analogy to Blaise Pascal’s famous theological wager about the existence of God, Metcalf suggests that even climate science skeptics would be wise to hedge their bets by supporting least-cost climate policy, for the same reasons they would buy fire insurance for their houses.

Metcalf introduces us to Ronald Coase, awarded a Nobel in 1991 for the insight that pollution rights can be allocated efficiently only if the parties hold explicit property rights, allowing them to negotiate. Next, we meet Arthur Pigou, who first observed that taxing pollution instead of beneficial activities can improve aggregate welfare by discouraging and reducing the unpriced costs of pollution. Pigou’s further insight was that the benefits of pollution taxes can offset much (sometimes all) of the economic drag normally associated with taxation.

Having neatly laid that groundwork, Metcalf turns to a real-world example: Sweden, which imposed a hefty $130/t CO2 tax in the early 90’s, using the revenue to reduce other taxes and equalize tax burdens. Sweden’s carbon tax has gradually but dramatically reduced its CO2 emissions, even as its economic growth has surged along a similar trajectory to that of the U.S.

Similarly, British Columbia imposed a revenue-neutral carbon tax in 2008 that has apparently reduced the province’s emissions while its economic growth exceeded the rest of Canada.

Paying For Pollution, Oxford Press (2019)

My favorite of Prof. Metcalf’s chapter titles is “Isn’t There a Better Way? (No, There Isn’t)” Here, Metcalf sets forth four criteria for climate policy. First, it should actually reduce emissions. Second, it should be cost-effective, delivering maximum efficacy per cost. Third, it should encourage innovation. And finally, it should be simple and transparent, to minimize administrative burdens and costs while limiting gaming and political meddling.

Metcalf walks us through real-word examples of alternatives to carbon pricing: regulations and subsidies. As examples of regulations, Metcalf examines performance standards and technology mandates EPA issued under the Clean Air Act. These encourage industry to comply by adopting the technology that EPA used to establish the standard; thus they don’t encourage much innovation. One example is the 1977 Clean Air Act mandate for power plants to install equipment to reduce sulfur emissions by 70 – 90%, regardless of the initial emissions rate. Congress chose this mandate to protect high sulfur eastern coal. Under the rule, dirty power plants that were burning high sulfur coal as well as cleaner ones that already had reduced emissions rates by burning low sulfur coal were forced to install scrubbers.[2] Metcalf points out estimates that it would cost roughly half as much to price sulfur dioxide emissions and let power plant operators choose whether to reduce emissions by installing scrubbers or buying western low-sulfur coal.

Automobile fuel efficiency (“Corporate Average Fuel Efficiency” or “CAFÉ”) standards might seem reasonably cost-effective, but because Congress included an exemption for light trucks, CAFÉ standards encouraged a perverse boom in gas-guzzling SUV sales. And the mandate for more efficient vehicles without a price on carbon has created a rebound effect. People drive their more efficient cars more miles, eroding net emissions reductions. Metcalf cites a study by Resources for the Future concluding that the average cost of reducing a ton of CO2 emissions via CAFÉ standards is about $85/ton, while a carbon tax would do the job for only $12/ton.[3]

Other alternatives to carbon pricing include subsidies and mandates. State-imposed Renewable Portfolio Standards (RPS’s) require utilities to generate a specified fraction of electricity from renewable sources. Metcalf points out that these rules do not encourage consumers to conserve electricity. A new study found that to reduce carbon emissions from electricity generation by 10%, an RPS program costs six times what carbon tax would.[4]

The federal government offers subsidies in the form of Production Tax Credits (PTC’s) to generators of wind and solar power. But by putting more power on the grid, the PTC reduces electricity prices, thereby increasing demand. Subsidies for hybrid cars mostly benefit the wealthy; with or without the subsidy they are the market for expensive hybrids. And policy interactions can create perverse incentives. Because CAFÉ imposes average fuel efficiency on each manufacturer’s fleet, selling an efficient hybrid in one place allows that manufacturer to sell an additional gas guzzler somewhere else.

On the “innovation” criterion, Metcalf points out the deep body of research concluding that zero-carbon energy R&D in both the public and private sector are woefully underfunded in terms of cost vs social benefits. By predictably increasing the cost of fossil fuels, whose prices now undercut cleaner alternatives, a carbon tax would provide incentives for private investment in clean energy R&D. Metcalf suggests the revenue from eliminating fossil fuel subsidies as a source of funds for public investment in clean energy R&D.

Having demonstrated the advantages of carbon pricing over regulations, subsidies and mandates, Metcalf proceeds to compare quantity-based carbon pricing mechanisms (caps) with price-based mechanisms (taxes).  In theory, Metcalf concedes, a cap-and-trade system can price carbon just as efficiently as a carbon tax. But in practice, the results of cap-and-trade have not been impressive. Both the California system and the European Union’s “Emissions Trading Scheme” have been plagued by price volatility and carbon prices too low to have much effect on demand or innovation. To stabilize prices, “collars” have been added to both systems. When triggered, an upper price limit effectively releases the emissions cap by issuing more allowances. And a price floor obligates the government to buy back allowances in order to prop up market prices. Thus, a cap-and-trade system with a price collar operates like a tax with a lot of needless complexity that increases opportunities for fraud and abuse. Metcalf also points out that only a carbon tax continues to prod further reductions even when standards, regulations and mandates have been met.

Metcalf next tackles the thorny question of revenue. He begins by citing an authoritative study issued by the Treasury Department in the waning days of the Obama Administration, concluding that the incidence of a carbon tax is distributionally-progressive. High income households would pay proportionally more carbon taxes than low and moderate-income households all the way up to the 95th percentile of income. Within the top 5%, the distribution becomes regressive, presumably because that top 5% are constrained by some other variable, like time. (Maybe one can only take so many globe-trotting flights in a day.)

Source: U.S. Department of the Treasury (2017)

When revenue from a carbon tax is returned via equal lump sum rebates (a.k.a., “dividends”) the net distributional effect becomes even more progressive. Another option is to use the revenue to reduce the top marginal corporate income tax rate. Not surprisingly, this option is regressive, but would have offered large efficiency benefits. Alas, Congress cut the corporate income tax rate in 2017 (without paying for the expenditure, thus substantially increasing the deficit) seriously blunting the efficiency argument for using carbon tax revenue to further cut corporate income taxes. Perhaps surprisingly, Metcalf’s book does not mention his proposal from a decade ago to use carbon tax revenue to rebate payroll taxes, an option that he showed would be distributionally-progressive and which was incorporated into a bill introduced by Rep. John Larson (D-CT).

Metcalf overviews “best practices” for carbon tax design. His touchstones are administrative simplicity, low compliance costs, broad coverage (avoiding exemptions) and a substantial enough price signal to actually reduce (and continue to reduce) greenhouse gas pollution. For simplicity, a carbon tax should be imposed at the narrowest point in the respective supply chains of coal, oil and natural gas – where there are fewest taxpaying entities. Metcalf suggests including some non-CO2 greenhouse gases, including fluorocarbon refrigerants. But he concludes that to discourage fugitive methane emissions from oil and gas wells and gas distribution systems, technology-based regulations make more sense than a tax. Metcalf invokes the standard free trade based arguments for border tax adjustments which would exempt exports from carbon taxes to avoid putting them at a competitive disadvantage,[5] while imposing carbon taxes on energy-intensive imports in order to avoid favoring imports.

The carbon tax rate and its rate of increase are rivaled only by broad coverage as a crucial design elements to assure effectiveness at reducing emissions. Metcalf suggests skipping over the controversy and uncertainty[6] surrounding how to estimate the “social cost of carbon,” instead just choosing a future emissions target and periodically adjusting the tax rate along the way to stay on track.

In a chapter titled “Objections to a Carbon Tax,” Metcalf debunks the myth that carbon taxes will hurt the economy or “kill” jobs. Citing standard macro-economic models, Metcalf assures us that economic growth will overwhelm whatever small economic drag might be created by carbon taxes. And that analysis does not include the much larger benefits of reducing future climate damage. Metcalf agrees that transition assistance is needed for coal miners and other fossil fuel workers displaced by the transition to low or zero-carbon energy, but he is quick to attribute the lion’s share of coal job losses to the shale-gas boom that has driven natural gas down to prices that encourage utilities to replace coal-fired generation with gas. He points out that the transition to a low carbon economy will create far more jobs in renewable energy than are lost in fossil fuel related sectors.

Metcalf also deftly dispatches the argument that a carbon tax imposed by the U.S. wouldn’t matter. He points out that border tax adjustments offer a prod to other nations to enact their own carbon taxes, and he assures readers that leadership by the world’s largest economy really does matter, perhaps especially on climate policy.

In his final chapter, Metcalf offers a passing glance at the elephant in the room – political resistance to carbon taxes.[7] He recalls the two principles of President Reagan’s 1984 speech which spurred Congress to enact comprehensive tax reform two years later. First, the reform had to be revenue neutral, and second, it had to lower tax rates by broadening the tax base and cutting out loopholes. Metcalf suggests that in order to sidestep the politically-charged debate over the “size of government,” carbon taxes should also be revenue-neutral.[8]

Metcalf says his biggest worry about climate policy is not that we will not enact it, but rather that we will choose inefficient policies. Noticeably absent from Metcalf’s carefully-balanced map of the “middle way” to a carbon tax is an appeal to the environmental left. Judging by reports about the “Green New Deal,” progressives seem to be jumping on the bandwagon for a range of inefficient and possibly ineffective regulations, subsidies and mandates. Some advocates have even gone so far as to explicitly exclude carbon taxes.[9] Maybe Metcalf is right to be worried.


[1] Readers (like me) who are more concerned about environmentally effective climate policy than about efficient (low-cost) policy can safely substitute the word “effective” in the many instances where Metcalf points out the efficiency (or cost-effectiveness) of carbon taxes. My assumption is that in a world where climate policy is constrained by political ambition, the most efficient policy is also the most effective. Of course, we climate hawks still have our work cut out to ensure and maintain an aggressively-rising carbon price, but the efficiency advantage of a carbon tax will pay off at any given level of political ambition.

[2] Metcalf notes that Congress eliminated this perverse provision in the 1990 Clean Air Act Amendments.

[3] Krupnick et al, 2010.

[4] Reguant, 2018.

[5] In “Can We Price Carbon?”(2018) political scientist Barry Rabe points out the popularity of ad-valorem severance taxes imposed at the point of fossil fuel production in states including Alaska, North Dakota, Wyoming, Oklahoma, Texas and California. Rabe points out that these severance taxes could easily be converted to carbon taxes by changing their basis from the dollar value of the fuel to its carbon content. Either way, their burden would continue to fall largely on out-of-state fuel consumers while funding popular programs in the states imposing them. For instance, Texas endows its Permanent University Fund with revenue from oil & gas severance taxes. This suggests that a carbon tax without a border tax adjustment to return tax revenue to producers of fuel for export might be more politically popular than a standard WTO consumption-based tax.

[6] Metcalf cites MIT economist Robert Pindyck, who has called the models used to estimate climate damage and the social cost of carbon “close to useless,” but who nevertheless argues forcefully for a carbon tax despite uncertainty about the “optimal” rate.

[7] For a terrific political science overview of carbon pricing successes and failures, see “Can We Price Carbon?” (2018) by Barry Rabe, which I’ve reviewed here.

[8] In a footnote, Metcalf concedes that by consistently approving increases in military spending and in 2017 by enacting tax corporate tax reductions that substantially increased the deficit (and overwhelmingly benefit the wealthiest households), Republicans have given fodder to liberals who question the good faith of Republican insistence on “small government” and their avowed aversion to deficits. Nevertheless, Metcalf insists that “this debate should have nothing to do with climate policy.”

[9]  See Grist, “Is the Green New Deal the Only Way Forward?” (December 10, 2018), quoting Evan Weber, “We’ve seen that carbon taxes are not winning elections, and they’re not winning at the ballot.”

WikiLeaks, Carbon Taxes and 115th Congress

John Podesta (January 2015): Polling on carbon taxes “all sucks.” But revenue options change voters’ minds.


WikiLeaks Reveals “Sanders Effect” on Climate Policy

WikiLeaks released e-mails this week showing that in January 2015, Hillary Clinton’s campaign staff studied carbon taxes, but avoided publicly advocating them because voter surveys indicated weak support.[1] Clinton’s polling confirms what others have found: Standing alone, carbon taxes are not an easy sell. But a more recent survey suggests that when the purpose and effect of carbon taxes are explained and the policy is coupled with a tax credit to offset financial impacts on low- and moderate-income households, plus assistance for displaced coal workers and reduced regulatory burdens, 66% of voters register support,[2] including 44% of Republicans and a whopping 86% of Democrats.[3]

“Americans on Clean Power,” Steven Kull (U. Md.) Sept. 2016.

During the 2016 presidential primaries, Senator Sanders advocated carbon taxes as a key climate policy. By July, reporters were asking Clinton campaign chairman John Podesta and energy adviser Trevor Hauser about carbon taxes. Both said that a Clinton administration would consider a carbon tax if Congress proposes it.[4] And Senator Schumer, on track to become Majority Leader, predicted that a carbon tax is “likely to pass the Senate” if Democrats regain the majority.[5]

In this context, the next Congress and the next presidential term may offer a long-awaited opportunity to enact carbon taxes, perhaps as part of broader tax and regulatory reform.

Carbon taxes might more fairly be called “carbon pollution fees” because they impose a fee for each ton of carbon dioxide dumped into the atmosphere, thereby creating economic conditions for a rapid, efficient shift to renewable energy and efficiency.[6] Furthermore, carbon taxes can reduce or avoid the need for more costly regulations and subsidies, appealing to libertarians and “free market” conservatives.[7]

And unlike regulations and subsidies, carbon taxes offer a substantial revenue stream that will grow for decades. Starting at $42/T CO2, the current official “Social Cost of Carbon,” a carbon tax would generate roughly $220 billion in its first year, approximately 5% of federal revenue.[8] A carbon price trajectory aggressive enough to drive down U.S. CO2 emissions 80% by 2050 would need to ramp up to about $440/T by 2050,[9] and would generate roughly $440 billion/year by mid-century even with only 20% of today’s carbon emissions. That’s approximately $11 trillion in cumulative revenue over the next 36 years.

The climate benefits of a carbon tax derive from its persistent, ubiquitous and rising price signal, efficiently directing investment and economic activity in all sectors away from fossil fuels and towards renewable energy and efficiency.[10] Furthermore, carbon taxes can reduce or eliminate the need for more costly and intrusive regulations and subsidies that do not produce revenue. From a climate policy perspective, the choice of how to allocate carbon tax revenue is secondary[11] with the caveat that a distributionally-fair design must protect purchasing power of low- and moderate-income households in order to remain politically viable. The Congressional Budget Office has estimated that approximately 27% of net carbon tax revenue would be needed to fully compensate low and moderate-income households;[12] existing mechanisms could efficiently distribute those funds without new programs or payment systems.[13] And that leaves 73% of the revenue from a carbon fee available for other purposes.[14]

Carbon Revenue Options for Congress

Funding sustainable infrastructure[15] or renewable energy with carbon tax revenue could magnify the climate benefits of “internalizing” the cost of climate pollution. In his 2016 State of the Union Address, President Obama proposed a $10 per barrel oil fee to fund infrastructure, a modest first step toward internalizing fossil fuel costs to fund a high priority and potentially transformative investment in public capital. Both major presidential candidates call for drastically increased infrastructure spending to help transform the U.S. economy and spur employment. Hillary Clinton calls for $125 billion/year; Donald Trump has suggested even higher figures.[16] Repair and maintenance of existing transportation infrastructure offers an especially high return on public investment[17] and is broadly supported by voters[18] increasingly irritated at traffic jams, transit and train delays.

Other attractive revenue options include payroll tax relief which would offset regressive impacts while spurring employment and economic growth.[19] Many economists and policymakers, including some conservatives and libertarians,[20] call for comprehensive tax and regulatory reform (a “grand bargain”), which could include carbon taxes to fund reductions in other taxes that inhibit economic growth.[21]

The list of revenue options and combinations is virtually unlimited. A basic tenant of public finance is that appropriations decisions should be based on public priorities. Earmarks and slush funds constrain appropriators, effectively letting special interests cut in line. Similarly, climate policy advocates should not latch on too tightly to their preferred revenue options.[22] Our focus must be on enacting a broad-based, briskly-rising carbon tax to create investor and consumer price expectations that make it pay to start reducing carbon pollution immediately and to continue de-carbonizing for the next half century.[23]

Next year could be our big chance for simple, effective and globally-replicable climate policy. Get ready for carbon taxes in 2017!


[1] “We have done extensive polling on carbon tax. It all sucks,” Podesta said in a leaked January 2015 memo. “WIKILEAKS: The carbon tax that Clinton decided not to use: $42,” ClimateWire, 10/21/16.

[2] Steven Kull et al, “Americans on Clean Power,” University of Maryland, 9/12/16, at p. 33-35. (Kull is Senior Research Scholar and director of the Program for Public Consultation. The survey was conducted from April – June 2016.)

[3] Id., at p. 34.

[4] During the Democratic Convention, reporters asked Podesta about Clinton’s views.  Podesta conceded that “if Congress wants to come forward with [a carbon tax proposal], we’ll take a look at it.”  “Carbon tax debate is back,”Politico, 07/27/16.

[5] Timothy Cama,“Clinton walks fine line on carbon tax,The Hill, 7/31/16.

[6] For a clear, balanced overview of recent literature on carbon taxes, see Donald Marron, Eric Toder, and Lydia Austin, “Taxing Carbon: What, Why and How,” Tax Policy Center, June 2015. (Marron has earned impressive conservative credentials, including a stint on George W. Bush’s Council of Economic Advisers.)

[7] Jerry Taylor, “The Conservative Case for a Carbon Tax,” Niskanen Center, March 2015.

[8] Greg Dotson, “Carbon Pricing in a Fiscal Context,” Center for American Progress, 6/29/16.

[9] Alan Fawcett, Leon C. Clarke and John P. Weyant, “Carbon Taxes to Achieve Emissions Targets,” 2014, included in compilation book by Ian Parry, Adele Morris & Roberton C. Williams, “Implementing a U.S. Carbon Tax,” 2015.

[10] British Columbia’s carbon tax, enacted in 2008, covers approximately 2/3 of the province’s emissions. Starting at $10/t CO2, (Cdn) the tax rose in annual $5 increments from to $30/t CO2 by 2012. This relatively modest corrective has reduced emissions about 10%.  See, Brian C. Murray and Nicholas Rivers, “British Columbia’s Revenue-Neutral Carbon Tax: A Review of the Latest ‘Grand Experiment’ in Environmental Policy,” Nicholas Institute at Duke University, May 2015.

[11] Donald B. Marron and Adele C. Morris, “How to Use Carbon Tax Revenues,” Tax Policy Center, February 2016.

[12] Terry Dinan, “Offsetting a Carbon Tax’s Costs on Low-Income Households,” Congressional Budget Office, November 2012.

[13] Chad Stone, “Designing Rebates to Protect Low-Income Households under a Carbon Tax,” Resources for the Future, 9/24/15.

[14] Adele Morris and Aparna Mathur, “A Carbon Tax in Broader U.S. Fiscal Reform: Design and Distributional Issues, Center for Climate and Energy Solutions, May 2014.

[15] Zia Qureshi, “Meeting the Challenge of Sustainable Infrastructure,” Brookings, June 2016.  “Seventy nine percent of Americans, including 72% of Republicans  support this idea.”  See also, “Building for the 21st Century: American support for sustainable communities, A national opinion survey,” Smart Growth America, March 2011.

[16] Derek Thompson, “One Issue Clinton and Trump Agree On,The Atlantic, 8/16/16.

[17] Ezra Klein, “The one thing Trump and Clinton agree on is infrastructure. This economist thinks they’re both wrong,, 10/4/16. (Quoting Harvard economist Edward Glaeser.)

[18]Poll: Infrastructure Unites Voters in Divisive Election Year — Republicans and Democrats Both Want Federal Government to Improve U.S. Infrastructure,” PR Newswire, 8/6/16.

[19] Gilbert E. Metcalf, “A Green Employment Tax Swap: Using A Carbon Tax to Finance Payroll Tax Relief,” Brookings Institution & World Resources Institute, June 2007. Representatives of both parties: Bob Inglis (R-SC) and John Larson (D-CT) have proposed carbon taxes whose revenue would reduce payroll taxes. (Sadly, after Inglis dared to acknowledge global warming and propose a revenue-neutral carbon tax, the Koch brothers funded challenger Trey Gowdy who defeated Inglis in a 2010 primary. Gowdy’s sponsorship by the Koch brothers is reported in “The Benghazi Committee’s Out of Control Effort to Destroy Hillary Clinton at All Costs,” Huffington Post, 10/22/15.)

[20] See Taylor, The Conservative Case for a Carbon Tax, supra note 7.

[21] Adele Morris and Aparna Mathur, “A Carbon Tax in Broader U.S. Fiscal Reform: Design and Distributional Issues,” Center for Climate and Energy Solutions, May 2014.

[22] For example, Citizen’s Climate Lobby insists, “Any proposal that does not return the proceeds of the tax to citizens through rebates won’t receive the Citizens Climate Lobby’s support.” (Quote from “Why Texas holds the key to carbon taxes,” Houston Chronicle, 9/30/16.) And on the other extreme, in Washington state, the Alliance for Jobs and Clean Energy is opposing I-732, a ballot initiative for a substantial carbon tax whose proceeds would cut the state sales taxes and supplement the Earned Income Tax Credit, out of disagreement with its revenue distribution. (As reported by Dave Roberts in “The left vs. a carbon tax,”, 10/18/16.)

[23] See Fawcett et al, supra note 9.