Carbon Footprint Taxes

We analyze whether a carbon consumption tax is logistically feasible. We consider a carbon footprint tax (CFT), which would be modeled after a credit-method value added tax. The basis for the tax would be a product’s carbon footprint, which includes all of the emissions released during production of the good and its inputs as well as any greenhouse gases latent in the product. Our analysis suggests that a pure CFT, requiring the calculation of the carbon footprint of every individual product, may be prohibitively costly. However a hybrid CFT seems economically feasible. The hybrid CFT would give firms the option to either calculate the carbon footprint of their outputs—and have their products taxed based on those footprints—or use product-class specific default carbon footprints as the tax basis, thereby saving on calculation costs. Because the CFT would be levied on all goods consumed domestically, the CFT would keep domestic firms on an even footing with those producing in countries without active climate policy, protecting competitiveness and reducing leakage.