Expanding the Reach of a Carbon Tax: Emissions Impacts of Pricing Combined with Additional Climate Actions

Putting a price on carbon dioxide (CO2) emissions can help governments reduce them rapidly and in a cost-effective manner. While 10 carbon tax bills have been proposed in the 116th US Congress, carbon prices alone are not enough to reach net-zero emissions by midcentury. Additional policies are needed to complement an economy-wide carbon tax and further cut CO2 from the US energy system.

This study aims to provide a better understanding of such policy combinations. It projects the energy CO2 emissions impacts of two carbon taxes, starting in 2021, that span the rates in the carbon tax bills in Congress. The “low” tax scenario starts at $30 per ton in 2021 and rises at 5 percent plus inflation per year, reaching $44 by 2030, while the “high” carbon tax starts at $15 per ton and rises $15 per year, reaching $150 by 2030. The paper then describes the barriers inhibiting emissions reductions beyond those achieved by the carbon taxes alone for each major sector: electricity, transportation, buildings, and industry. Finally, it explores the energy system changes needed to overcome those barriers and the policy interventions that could deliver those changes. For certain key energy system changes, it provides quantitative estimates of emissions reductions incremental to the two carbon taxes.

This paper is part of a joint effort by Columbia University’s Center on Global Energy Policy (CGEP) and Rhodium Group to help policymakers and other stakeholders understand the important decisions associated with the design of carbon pricing policies and the implications of these decisions. The paper finds the emissions impacts of the low and high carbon taxes alone lead to economy-wide energy CO2 emissions reductions by 2030 of 33 percent and 41 percent, respectively, below 2005 levels. A carbon tax combined with policy actions that support comprehensive, ambitious energy system changes could lead to emissions reductions in the range of 40 to 45 percent, arguably consistent with US midcentury deep decarbonization goals for the energy system.

In the 2020s, the bulk of these emissions reductions are likely to occur in the power sector, even under a broad decarbonization strategy, due to the significant barriers to large near-term emissions reductions in the transportation, buildings, and industrial sectors.

In addition, the paper finds:

  • Barriers to decarbonization prevent carbon prices from driving further reductions. A carbon price works best when producers and consumers can see and respond to price signals and can easily shift to low-carbon alternatives. Three cross-cutting barriers to additional emissions reductions alongside a carbon tax are: (1) consumer behavior and preferences, (2) lack of substitutes, and (3) slow stock turnover.
  • Encouraging nationwide energy system changes can lead to additional CO2 emissions reductions beyond the carbon tax in every major sector. Among the most effective energy system changes at producing emissions reductions by 2030 are limits on new natural gas power plants and improved energy efficiency in buildings. Among the least effective is additional support to prevent the retirement of existing nuclear plants, because a carbon tax alone is sufficient to keep the vast majority of plants competitive through at least 2030.
  • The carbon tax rates influence the effectiveness of additional energy system changes. For changes that focus on electrification (e.g., electric vehicle deployments), additional emissions reductions are larger with higher carbon tax rates due to the lower carbon electricity system. For other energy system changes (e.g., limiting new natural gas power plants), emissions reductions are smaller with higher carbon tax rates because the carbon tax by itself achieves some of the same outcomes.
  • The emissions impacts of additional energy system changes are small relative to the impacts of the carbon tax alone. In combination with market forces and policies already in place, the carbon taxes cause annual emissions to fall 1,223 to 1,707 million metric tons (MMT) between 2019 and 2030. The range of energy system changes explored in this analysis cause emissions to fall an additional 0 to 195 MMT. The small impacts are especially notable outside of the power sector, where carbon taxes and market forces also fail to drive significant emissions reductions by 2030.
  • For certain energy system changes, though, the small emissions reductions by 2030 mask large, longer-term changes that could significantly help the United States achieve its midcentury decarbonization goals. For example, the analysis shows that a mandate for zero-emissions light-duty vehicles of 50–70 percent of new sales by 2030 would only reduce emissions by 36–79 MMT in 2030, largely because only 2 percent of the vehicles on the road turn over each year. However, such mandates are consistent with pathways to achieve 100 percent zero-emissions vehicle sales by around 2040.

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