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Janet E. Milne
While carbon tax measures have not yet met with success at the federal level in the United States, proposals for carbon taxes emerged in a handful of states in 2015 and 2016. The proposals address the shared challenge of climate change, but each has its own unique features and setting. Drawing on proposals in Oregon, Massachusetts, Vermont and Washington as case studies, this chapter explores how state constitutions can affect the design of state-level carbon taxes and their legislative route toward enactment. For example, the Oregon constitution imposes limits on tax rates and use of the revenue when taxing certain fossil fuels. The constitutions in three of the four states require that some types of revenue measures must originate in the legislative House of Representatives, not the Senate, raising the question whether carbon taxes can be designed in a manner that will avoid this procedural constraint. In Washington, the carbon tax proposal came forward as a ballot initiative that went to voters in the general election, following a procedure permitted under the state constitution. These case studies serve as an important reminder of how constitutional provisions that were not created with climate change in mind can influence the design features of subnational carbon taxes and political strategies.
The global degree of carbon dioxide (CO2) concentration in the atmosphere has reached worryinglevels, continuing to rise along a steep upward trend.Stabilizing or even reducing CO2 concentration would require drastic global emissions abatement, considerably above 50 per cent. Such a great reduction, difficult to attain within a reasonable time horizon, would entailhuge costsfordevelopingcountries. Most recent guidelines suggest large-scale integrated approaches, combining measures to both strengthen efforts to reduce emissions and boost carbon sequestration.Among market-based instruments, literature indicates that carbon taxes are one of the most cost-effective for emissions reduction,in particular, upstream (or production-based) CO2 taxation,a tax levied the point of source, as it has low administrative costs and ensures great coverage. If imposed unilaterally,however, this kind of tax could entail significant economic costs, mainly through competitiveness losses, and could become environmentally ineffective due to carbon leakage phenomena.Literature then suggests as a viable alternative, the CAT (carbon-added tax), a downstream, or consumption-based, carbon tax. It has the advantage ofprotecting competitiveness of domestic producers, as it is levied on imports and reimbursed on exports. In this chapter, the implementation of a fuel-added carbon tax (FACT), a duty levied on fossil fuel embodied in goods and services and modelled after value-added tax (VAT), is considered and compared with the tax on fossil fuel purchases (FCT), the simplest and most common upstream carbon tax. In particular, macroeconomic effects of both taxes are estimated for Italy. The chapter also briefly reviews characteristics and implications of production-based carbon taxes; examines downstream taxation and describes the FACT; deals with differences between FCT and FACT both from a theoretical and empirical point of view. In particular, the effects of their implementation in Italy are analysed and compared. A technical appendix on FACT simulation follows the conclusion.