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What is Carbon Pricing?

February 16, 2022

In the New York State Climate Action Council’s Draft Scoping Plan, the Council recommends implementing some form of carbon pricing to help the state combat climate change. So, what is carbon pricing, and how would it impact New York?

What is carbon pricing?

Carbon pricing is based on three premises:

  1. Man-made carbon emissions are causing climate change;
  2. Currently, society bears the cost of carbon emissions and their related environmental and economic impacts;
  3. Those who emit carbon should bear those costs, proportionally based on emission levels.

Carbon pricing policies tax the negative externalities of carbon emissions, creating a market-based incentive to reduce emissions.

How can carbon pricing take form?

There are two main types of carbon pricing policies. New York’s Draft Scoping Plan recommends considering both:

  1. Carbon Tax. The state would set a certain price per ton of carbon dioxide emitted.
  2. Cap and Trade. The state would set a cap on how much carbon each company can emit. Companies that reduce their emissions can sell or trade their surplus emission allowance to companies that need extra.

For example, Company A and Company B both emit 100,000 tons of carbon in 2021.

If New York had a $35/ton carbon tax, they would both owe $3,500,000.

If New York had a cap-and-trade system, both companies might be capped at 100,000 tons/year. Company A invests in electric vehicles and reduces its emissions to 90,000 tons/year, leaving a surplus of 10,000 tons. Company A could then auction off its surplus allowance. If Company B makes no emissions changes and may exceed its 100,000-ton cap, it can bid on Company A’s surplus allowance.

Other policy considerations

  1. Types of emissions. Some proposals only target carbon dioxide emissions; others target additional forms of greenhouse gases.
  2. Revenue allocation. A new tax means new revenue, and the state would need to decide how it would invest that extra revenue. An economically sound policy would use this revenue to mitigate the economic harm from carbon pricing, but Albany has a propensity for spending newfound revenue on unrelated political priorities.
  3. Federal v. state action. While the state considers carbon pricing, the idea has bounced around Congress, too. A state program would make doing business in New York more difficult. However, if the federal government acts on this issue, New York businesses could better compete with other states, and companies would not have to deal with a patchwork of varying state policy.

What is the Council planning?

The Draft Scoping Plan that recommended carbon pricing is light on details. However, two proposals in the state legislature may provide hints on what we can expect.

The Climate and Community Investment Act would add a carbon tax of $55/ton of emitted carbon. Some revenue would go toward infrastructure and renewable energy, and a significant portion would be invested in disadvantaged communities. It is estimated that this tax would add 55 cents to the cost of a gallon of gasoline.

Also, the Senate Energy Committee Chair sponsors carbon pricing legislation (S.3336/A.77). This proposal would tax all “carbon-based fuels,” defined as coal, natural gas, biomass, petroleum products, or any other product that emits carbon dioxide or other greenhouse gases. Emissions would initially be taxed at $35/ton of carbon emitted. The tax would increase by $15 annually until reaching a maximum of $185/ton. 60% of the revenue would be distributed to low and moderate-income residents, and the other 40% to mass transit, renewable energy, efficiency upgrades, and other environmental improvements.

Are there positives to carbon pricing?

Some free-market thinkers believe carbon taxation is the least invasive way the government can meaningfully reduce emissions.

The American Enterprise Institute’s Alex Brill argued that a carbon tax would be the simplest and most affordable emission reduction policy to implement. He states:

“Broadly speaking, there are three approaches U.S. lawmakers can consider when they want to shift behavior among consumers and producers: require people or businesses to change (regulations), pay people or businesses to change (subsidies), or price the unwanted behavior (a tax). We have ample experience with clean-energy regulations and subsidies, and they have clear faults that a tax does not.”

The U.S. Chamber has also warmed to market-based carbon approaches at the federal level, although it has not explicitly endorsed carbon pricing.

Although carbon pricing may have merit at the federal level, the fact is that state-level carbon pricing will put New York businesses at a competitive disadvantage, and New York residents will be left with an even higher cost of living.

What’s next?

The Climate Action Council is accepting public comments on its Draft Scoping Plan through April 30. To weigh in, use the BNP’s one-click tool.