Putting a price on carbon is widely regarded as the most effective way to address the market failures that are preventing the economy from responding effectively to the threats – and opportunities – of climate change.

Cap & Trade and Fee & Rebate (i.e., a carbon tax) are the two market-based mechanisms that create a price on carbon. In the absence of action at the federal level, states and regions have stepped up as laboratories of innovation for these tools.

For investors, cap & trade implementations like RGGI, the Regional Greenhouse Gas Initiative in the northeast US, or the carbon tax in British Columbia, may have limited financial impact today. But each new implementation provides real-world evidence of economic impact on industries and economies. That information will be increasingly valuable to forward-looking investors as the systems are inevitably more widely implemented.

Those interested in learning from – or influencing – the development of these systems may want to follow the legislative and public process now underway in Massachusetts, where a carbon tax bill will have its first major hearing next week. S1747, an Act combating climate change, was introduced by Senator Michael Barrett and co-sponsored by 44 of his colleagues (just over 20% of entire legislature).

What makes this effort of additional interest even beyond Massachusetts is that Massachusetts is already participating in RGGI. S1747 would apply to all carbon-based fuels except those covered under RGGI (all electric generating facilities over 25 MW). If such a carbon tax were implemented, Massachusetts would be among the first economies to have virtually all sources of carbon emissions priced. It would also be one of the only economies where both alternative methods of carbon pricing – cap & trade and fee & rebate – co-exist, and perhaps compete.

The hearing of the Joint Committee on Telecommunications, Utilities and Energy will be held on Tuesday, October 27th, from 1:00 – 5:00 pm in Hearing Room B-1, in the basement of the Massachusetts State House.

S1747 is one among many bills hearing testimony on the 27th, but as the rest are concerned with either renewable energy or recycling, some may also be of interest to the sustainable investment community.

The carbon fee & rebate system envisioned for Massachusetts by Senator Barrett in S1747 has a long and uncertain road ahead, to be sure. Even if favorably reported by the TUE Joint Committee, it would eventually come before the individual Ways & Means committees and require the active or tacit support of leadership in both houses. But with legislative leadership and the Governor both interested in comprehensive energy legislation this term, a carbon tax could become part of the mix if it generates interest and support outside the legislature as well.

A Carbon Tax for Massachusetts?