If we were to imagine a policy that not only reduces carbon emissions and stimulates the economy but also unites arguably the largest divide in the U.S. – the polarization between the Republican and Democratic parties – we wouldn’t be dreaming; these are the promises of a well-designed carbon tax.

Such a policy could help bridge the partisan divide in the U.S. because it would align with conservative and liberal priorities. It would incentivize a reduction in carbon emissions due to the promise of increased economic efficiency while generating government revenue for social redistribution. While this policy’s environmental upsides are self-explanatory, it’s important to look beyond the scope of climate change.

MIT Professor Deborah Lucas and Barclays Head of Research Jeff Meli discussed the potential of a carbon tax, having approached this topic from an economic standpoint. One important takeaway of their analysis is that greenhouse gases are a negative externality, meaning that although only a certain number of companies are responsible for the exceedingly high carbon emissions, it’s all of society that endures the costs associated with them. A carbon tax would help internalize this externality, making it so that this “carbon burden” would be mostly carried by the large greenhouse-gas emitters.

In other words, by making highly polluting firms pay for the societal costs their emissions create via a carbon tax, the total cost to society would be reduced, as these emitters would become financially incentivized to reduce their carbon footprint in the most cost-efficient way possible. This aligns with the concept of economic efficiency, where the goal is to achieve a desired outcome at the lowest possible cost to society.

Some states (California, Washington and the 11 Northeast states that comprise the Regional Greenhouse Gas Initiative) have implemented carbon pricing policies, less aggressive ways of holding firms accountable for carbon emissions. However, these policies are usually cap-and-trade programs that, instead of setting a price on emissions, set a maximum number of emissions “allowances” per year. Therefore, these might not be the most effective option to lower carbon emissions. If the cap is set too high to accommodate larger emitters, smaller firms may view it as a “free pass” to increase their emissions. By passing a carbon tax bill and implementing it at the federal level, policymakers could avoid the pitfalls of overgenerous emissions caps and ensure that all emitters face the same cost per ton of CO₂.

It’s important to note that Sweden has demonstrated remarkable efficiency with its carbon tax, which was introduced in 1991 at a rate of around $26 per ton of CO₂, having incrementally increased to approximately $131 by 2024. This gradual implementation gave Swedish households and businesses time to adapt, improving the overall feasibility of the policy. Focused on fossil fuels, this tax was simple to administer since it leverages existing excise systems and measures carbon content rather than emissions, making price-setting less elastic. Covering over 95% of Sweden’s fossil carbon emissions, this policy incentivizes energy efficiency and renewable energy use while generating significant revenue for the country’s general budget, showcasing a balanced and adaptable model that could be applied to the U.S.’ climate policy framework.

Despite the existence of such an effective precedent, there is still the concern that a carbon tax would constitute a regressive policy. A carbon tax would cause an increase in the cost of carbon-intensive goods and services, from electricity to gasoline, which would disproportionately affect the American population.

Low-income households would pay a larger portion of their limited income toward this tax, exacerbating financial inequality. However, it would be possible to mitigate this by using some of the government revenue raised by the tax to set up recurring payments to low-income Americans. This solution would imply the creation of a sort of tax rebate bracket, based on household income, so that financially disadvantaged households or individuals wouldn’t be negatively affected by this tax.

Global temperatures are higher than ever. 2023 saw a global surface temperature approximately 1.18 degrees Celsius higher than the average in 1880. This means that people, property, the environment and the economy will become increasingly endangered as the number of recent “natural” disasters rises. We can therefore view this concern as a nonpartisan one, as both social and economic impacts will be heavily felt across the U.S. if the government doesn’t come together to approve this policy.