However, necessary information is known. To fully internalize

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Last updated: August 13, 2019

However, a carbon tax inevitably has its own shortcomings. Firstly,determining the tax price that leads to the desired internalizing of costs isdifficult because not all of the necessary information is known. To fullyinternalize the costs, the tax rate would have to equal the marginal externalcosts to ensure that marginal social benefits equal the marginal social costs (Metcalf,2009). To set such a tax, the government would need to estimate the marginalcost of abatement as well as the marginal benefit from abatement. This is adifficult task because the government needs accurate information about marginalcosts of abatement from firms and has to put a price on external costs.

It is challengingto assign an accurate monetary value to harm that is imposed on society and theenvironment. The IPCC recently released a report claiming that most taxestimates undervalue the price of CO2 emissions since quantifying externalitieson the environment is complex (Parry, 1997). Because of these uncertainties,estimates of the optimal tax rate varies. TheCarbon Tax Center is in favor of a 10 dollars per ton of carbon dioxide and thenraising it every year for at least ten years (Carbon Tax Rate). Yet,there remains debate and, therefore, no consensus regarding what an optimal taxrate would be at this time in the United States.

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