Designing a “Smart” Carbon Tax

Regulation and government funding of R&D are necessary but not sufficient to slow climate change. To transform energy use and supply across the economy, greenhouse gas (GHG) emissions will have to be priced and the power of the market brought to bear.

Traditional tax designs are blunt instruments that treat all oils alike and tax only consumption of end products.

  • Blunt taxes leave major unconventional oil emissions untaxed, treat dirtier oils more favorably than cleaner ones, provide no incentive for technological innovation, and offer no incentive for refiners to consider climate in determining product mix.

  • For the first time it is possible to quantify the amount and profile of GHG emissions from all oils throughout the supply chain using the Oil-Climate Index developed by researchers at the Carnegie Endowment for International Peace, Stanford University, and the University of Calgary, allowing replacement of blunt taxes with a smart tax design.

  • A smart tax differentiates among the chemical entities called “oil,” accounts for GHG emissions along the entire oil supply chain, and includes byproducts that do not fuel transport, thereby correcting the shortcomings of a blunt tax.