Talking Tax Reform: Tax Policy for a Greener Economy

Presented by:

Will McBride

Alex Muresianu

Debate swirls around the transition to a greener economy. On October 1^st, the European Union (EU) began implementing its carbon tariff, called the Carbon Border Adjustment Mechanism (CBAM). Starting in 2025, the policy will place a tax on certain carbon-intensive imports. CBAM is intended to put EU industry that is subject to the EU’s cap-and-trade system on the same level as foreign, more emissions-intensive industries. Partly in response to CBAM, American politicians have also considered taxing carbon-intensive imports.

The U.S.’s climate policies have also created some controversies in the EU. The substantial green energy tax credits passed in the Inflation Reduction Act (IRA) last year include several protectionist measures, which have created trade disputes between the U.S. and EU.

Countries use a variety of policies to reduce carbon emissions and incentivize green energy production. However, as borrowing costs skyrocket, substantial government subsidies for green energy investment may no longer be viable. And it is an open question whether carbon taxes can achieve carbon emission reduction goals without major harm to the economy.

To help put these debates and policies in context, the Tax Foundation hosted a Talking Tax Reform event to evaluate carbon taxes, a primary tool in the climate toolbox, and preview forthcoming research that ranks 31 national carbon taxes currently in effect.

Tax Foundation experts Will McBride and Alex Muresianu hosted an in-depth discussion on carbon taxes across countries and other major climate policy tools. Will and Alex compared the IRA and real-world carbon taxes, focusing on each policy’s economic and fiscal impact. Alex also previewed forthcoming research evaluating carbon taxes across countries on their efficiency or proportion of carbon emissions included in the tax base.

Our experts highlighted design features that make a carbon tax more efficient and how European countries have designed their national carbon taxes around the cap-and-trade system.