By Mikkela Blanton

April 2021

The City of Boulder passed a carbon tax in 2006. While Boulder was the first city in the nation to pass a carbon tax, Denver may be the first major city in the U.S. to do so. An initiative nicknamed “Polluters must pay” is in the process of gathering signatures to make the November 2021 ballot. If the initiative passes, property owners in Denver will receive an allowance on how much electricity and natural gas they can use; usage over the allotted amount would result in an extra tax. The program would exempt certain property owners, including those with solar panels and those who are low-income and receive government aid. 

Passing the initiative could be part of Denver’s (and the state of Colorado’s) broader efforts to meet ambitious emissions targets in the coming years. Advocates say that revenue collected from the tax could be used for energy-efficiency upgrades in buildings, programs to help communities adapt to climate change, job training in clean energy, and more. 

What Is a Carbon Tax? 

A carbon tax is a tax on the amount of carbon emitted by a given entity. When a carbon tax system is in place, the government sets the price for how much money a user has to pay for each ton of carbon they emit. Sometimes, a user might be allocated a certain amount of carbon for “free”; only if they go over their preset allocated amount will the tax kick in. In other structures, the tax may apply to each ton of carbon emitted. 

A carbon tax may be structured upstream, midstream, or downstream. If a carbon tax is upstream, the tax falls on the suppliers of the fuels that lead to emissions, such as coal suppliers, oil refineries, and natural gas processing facilities. When a tax is midstream, utilities take a hit for the tax. And when a carbon tax is downstream, those who actually emit the carbon – such as residential homeowners or commercial business owners – are responsible for paying. 

What Are the Benefits & Drawbacks?

One key benefit of a carbon tax is that the tax raises a significant amount of revenue, which can be used to fund everything from climate-related efforts, to infrastructure, to dividends back to consumers, to investments in technology. 

Some data shows that carbon taxes can also be beneficial at curbing emissions. In Boulder, emissions have fallen 21% from 2005 levels.  

A carbon tax may also help to spur technological innovations that put clean technologies on a more even playing field with GHG-emitting technologies. 

Importantly, carbon taxes – when designed effectively – can simultaneously achieve carbon emissions and sustainability goals and take steps to close the wealth gap by enabling governments to invest in essential public priorities.

When not designed or implemented correctly, carbon taxes can be regressive and unfairly pose a burden on lower-income individuals. However, it is possible to design a progressive carbon tax. 

Some also argue that a carbon tax may curtail economic growth and hinder businesses’ abilities to remain competitive. Impacts on a business or an industry are dependent on multiple factors, including the level of the tax, the amount of energy used by a business or industry, the industry’s competitive position in the market, and how the tax revenues are recycled. 

In addition to benefits and drawbacks, there are also some complexities to implementing a carbon tax. There is debate over where it’s best to implement the carbon tax – upstream, midstream, or downstream; there’s also the challenge of calculating the price of carbon. While the social cost of carbon set by the Biden Administration is $51/ton, some experts argue that it should be much greater. Finally, some question whether a cap-and-trade program is a better option. 

What Is a Cap-and-Trade Program?

Carbon taxes and cap-and-trade programs are two of the best-known market strategies for curbing emissions. In a cap-and-trade system, businesses don’t have to pay taxes on the carbon they emit, but they are limited to only emitting a certain amount of carbon – a cap that’s set by the government. Allowances (the amount of emissions permitted) can be bought and sold, creating a carbon market that sets a price on carbon. While a cap-and-trade system has been proposed in Colorado, the proposal was rejected by the Colorado Air Quality Control Commission (AQCC) in February 2021. 

As Colorado explores various options for mitigating emissions and halting global warming, both market strategies may be on the table in the future at the state level.