States Take on Carbon Taxes

  • May 19, 2021

Earlier this month, the North Carolina state senate introduced a bill calling for a new tax on distributors of carbon-based fuel. This development bears watching as it may signal a growing state-level tax policy trend toward taxing carbon emission. Given the lack of a nationally uniform net-zero emissions policy and carbon pricing controls, the states are taking pursuing their own policies -- at least until a more rigorous federal standard emerges. If and when that occurs, it would pre-empt any similar state actions under the Supremacy Clause of the Federal Constitution. 

The North Carolina bill, which passed on first reading and was referred to another senate committee, defines a carbon-based fuel product “as coal, a petroleum product, natural gas, or electricity produced from such fuels.” The bill would require “every distributor (the vendor of a carbon-based fuel, at the first point of sale within the state) to pay a tax on any carbon-based fuel product sold, used, or entered into the state by the distributor for purposes of distribution or use within the state.” That tax rate would start at $20 per metric ton of carbon dioxide equivalent in 2022. That rate can increase a set amount annually until the rate reaches $50 per metric ton of carbon dioxide equivalent.  Although Canada had implemented carbon tax legislation in 2019, the law was challenged and upheld back in March. Under the Canadian model, provinces can design and implement their own carbon pricing system; if they lack one, or if they have an “insufficient” system that does not meet federal standards, a regulatory fee is charged.  This model may not work well here in the U.S. given our constitutional directives.

The broader implications of the bill are important. As I’ve mentioned, a carbon tax and/or emissions trading system (ETS) at the federal level appears unlikely right now. That’s not the case at the state level, where carbon taxation remains a developing area of policymaking. This development is ripe for acceleration as states take action to address revenue deficits and budget shortfalls that arose during the COVID recession. No U.S. state has a carbon tax – yet.  Since 2018, several states – including Connecticut, Hawaii, Maryland, Massachusetts, Minnesota, Montana, New Hampshire, New Mexico, New York Rhode Island, Texas, Utah, Vermont and Washington – have proposed legislation to enact a carbon tax, but these efforts have failed.  According to PriceonCarbon.org, all attempted but failed to pass this type of legislation. 

Nevertheless, there are precedents for this type of tax, as a few states already have some form of energy taxes. Additionally, the Regional Greenhouse Gas Initiative (RGGI) was formed a dozen years ago and currently counts the New England states along with New York, New Jersey, Maryland, Delaware and Virginia as members (Pennsylvania also appears poised to join).  As the Center for Climate Energy Solution (C2ES) points out, “RGGI is the first mandatory cap-and-trade program in the United States to limit carbon dioxide emissions from the power sector. California’s program was the first multi-sector cap-and-trade program in North America, although not a part of the RGGI. 

That initiative and North Carolina’s new bill may motivate other state legislatures to pursue their own form of carbon taxation or ETS. While federal preemption – a situation in which a federal law takes primacy over state laws in a specific field of legislation – would halt states from pursuing carbon taxes, should their standards not rise to the federal mandate, that obstacle seems unlikely to materialize any time soon. On a final note, only one municipality, Boulder, Colorado, has initiated its own Climate Action Plan (CAP) tax since 2007. It is the nation’s first voter-approved tax dedicated to addressing climate change, according to PriceonCarbon.org.


Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.

Blog Author

George L. Salis, Principal Economist and Tax Policy Advisor at Vertex Inc.  Vertex's Chief Tax Office (CTO) provides insight regarding the impact of tax regulations, policy, enforcement, and emerging technology trends on global tax department operations.

George L. Salis

Principal Economist & Tax Policy Advisor

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George L. Salis is Principal Economist and Tax Policy Advisor who is an economist, lawyer and tax professional with over 28+ years of experience in international taxation and trade compliance, tax planning and controversy, fiscal regulation and tax economics consulting. He is responsible for analysis of economic, legal, financial, trade, and development issues in countries, as well as tracking and analyzing the rapid change in tax policies and regulations, and inter-governmental organizations, and tax administrations around the world.

George is the recipient of the Advanced Certificate in EU Law from the Academy of European Law, European University Institute in Florence, and the Executive Certificate in Economic Development from the Harvard Kennedy School of Government.

George holds a BSc in economics and political science, an LLB (Honours), an MA in legal and ethical studies, and an LLM (Honours) in international tax law. He also holds a PhD in international law and economic policy and is a Certified Business Economist (NABE).

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