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Economy

A Carbon Tax Is Back on the Table

The Trump tax cuts expire in 2025, which means things are about the get wacky in Washington.

Putting a price tag on pollution.
Heatmap Illustration/Getty Images

Climate policy has been all over the place lately thanks to pressure from interest groups, pre-election jitters, and the plausibility of a re-elected President Donald Trump laying waste to existing climate policy.

But further in the future, beyond the ups and downs of electoral politics, there’s a policy cataclysm coming that, some hope, could create an opening for that long sought, always denied dream of climate policy: the carbon tax.

Let’s back up. There are two things happening that might free up this policy space, one domestic, and the other overseas. At the end of 2025, much of the Tax Cuts and Jobs Act, otherwise known as the Trump tax cuts, will expire, including several provisions that many in Congress will want to extend, including lower income tax rates, a higher standard deduction and personal exemption, and an expanded child tax credit.

At the same time, much of the revenue that helped pay for those tax cuts — such as limitations on deductions for mortgage interest and state and local taxes — will also expire.

Measures that reduce taxes tend to be popular and those that raise them tend not to be, and that’s as true with the Trump tax cuts as with anything. (Since basically the day the TCJA passed, there’s been intense bipartisan opposition to the limitation on deductions for state and local taxes, for example.) That they’re expiring all at the same time will create a policy free for all.

And just as the Trump tax cuts expire, the European Union’s Carbon Border Adjustment Mechanism will come into full effect in January 2026, complementing its existing cap-and-trade and carbon pricing system. Essentially, CBAM is a tariff on imports from countries that don’t price carbon the same way the EU does, and it’s designed to prevent what’s known as “leakage,” where producers in countries with a carbon price simply offshore emissions-intensive production to countries that don’t. (It also helps make sure those products from other countries aren’t able to undercut domestic producers on price, a facet of the policy some have pooh-poohed as protectionist.)

Starting last year, EU trading partners had to begin reporting the carbon content of some emissions-intensive exports in preparations for payments starting in 2026. One of those trading partners is the United States, which exports some $351 billion worth of goods to the EU, second only to Canada.

Bills that would just address the carbon price gap have been proposed several times in the current Congress, including by climate stalwart and Democrat from Rhode Island, Senator Sheldon Whitehouse, plus some Republicans who think America should get an advantage over China for having a less carbon-intensive manufacturing sector.

This all creates a kind of celestial alignment in favor of a policy that has been rejected so many times (RIP the 2009 cap-and-trade bill and Bill Clinton’s BTU Tax) — or at least that’s what its advocates hope. Based on the history of carbon taxation and related polices, you might be pessimistic. But we haven’t seen a year like 2025.

“If you think about carbon price relative to raising people’s income taxes, when you put it in the whole fiscal conversation that’s going to happen in 2025, it’s going to look more attractive,” Catherine Wolfram, a Massachusetts Institute of Technology economist and former Treasury official in the Biden administration, told me. Wolfram was also one of the authors of a paper released last week by the Brookings Institution’s Hamilton Project mapping out how various climate policies could emerge from the witch’s brew of TCJA expiring and carbon tariffs would actually effect U.S. emissions.

The paper concluded that of the seven 2025 climate policy options they considered — including doing nothing to the IRA and enacting planned new emissions rules, doing nothing to the IRA with no new emissions rules, repealing the IRA, expanding the IRA tax credits for clean electricity, instituting a carbon fee starting at $15 a ton, instituting a clean electricity standard that would mandate a certain portion of electricity be produced from non-carbon-emitting sources with fees for noncompliance, and a carbon fee along with repealing some parts of the IRA — the carbon fee and the clean electricity standard would bring emissions down by the most, just missing the stated 2030 target.

And that’s just U.S. emissions. Wolfram said that if the U.S. were to institute a carbon fee, it would be a major step towards a worldwide carbon price, as countries would want to avoid paying fees to both the U.S. and Europe for pollution-intensive exports. “The more countries that get in this game,” Wolfram said, “the more powerful that policy can be.”

Whitehouse spoke at a Brookings event last week, saying, “We’ll find out a lot when people start getting tariffed through the European Union CBAM,” and that even Republicans were “pricing curious” due to the specter of carbon tariffs. “The forces are converging on making that work,” he added about the idea of finally getting a carbon price of our own.

Wolfram is also — cautiously — optimistic. “We haven’t tried since 2009. That’s 15 years ago,” she said. “The climate continues to change, and it’s changed pretty dramatically in the last 15 years. I don’t think we should have too many conclusions about what’s possible.”

Editor’s note: This story has been corrected to reflect that Whitehouse is a Senator from Rhode Island.

Green
Matthew Zeitlin profile image

Matthew Zeitlin

Matthew is a correspondent at Heatmap. Previously he was an economics reporter at Grid, where he covered macroeconomics and energy, and a business reporter at BuzzFeed News, where he covered finance. He has written for The New York Times, the Guardian, Barron's, and New York Magazine.

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