Jonathan L. Ramseur
Specialist in Environmental Policy
Jane A. Leggett
Specialist in Energy and Environmental Policy
Molly F. Sherlock
Specialist in Public Finance
In the context of budget deficit and fiscal policy debates, policymakers have considered a number of options for raising additional federal revenues, including a carbon tax. A carbon tax could apply directly to carbon dioxide (CO2) and other greenhouse gas (GHG) emissions, or to the inputs (e.g., fossil fuels) that lead to the emissions. Unlike a tax on the energy content of each fuel (e.g., Btu tax), a carbon tax would vary with a fuel’s carbon content, as there is a direct correlation between a fuel’s carbon content and its CO2 emissions.
Carbon taxes have been proposed for many years by economists and some Members of Congress, including in the 113th Congress. However, based on concerns regarding the potential negative economic impacts of a carbon tax, some Members have introduced concurrent resolutions opposing a carbon tax.
If Congress were to establish a carbon tax, policymakers would face several implementation decisions, including the point and rate of taxation. Although the point of taxation does not necessarily reveal who ultimately bears the cost of the tax, this decision involves trade-offs, such as comprehensiveness versus administrative complexity.
Several economic approaches could inform the debate over the tax rate. Congress could set a tax rate designed to accrue a specific amount of revenues. Some would recommend setting the tax rate based on estimated benefits associated with avoiding climate change impacts. Alternatively, Congress could set a tax rate based on the carbon prices estimated to meet a specific GHG emissions target.
Carbon tax revenues would vary greatly depending on the design features of the tax, as well as market factors that are difficult to predict. A study from the Congressional Budget Office (CBO) estimated that a tax rate of $20 per metric ton of CO2 would generate approximately $88 billion in 2012, rising to $144 billion by 2020. The impact such an amount would have on budget deficits depends on which budget deficit projection is used.
When deciding how to allocate revenues, policymakers would encounter key trade-offs, such as minimizing the costs of the carbon tax to “society” overall versus alleviating the costs borne by subgroups in the U.S. population or specific domestic industries. Economic studies indicate that using carbon tax revenues to offset reductions in existing taxes—labor, income, and investment— could yield the greatest benefit to the economy overall. However, the approaches that yield the largest overall benefit often impose disproportionate costs on lower-income households.
In addition, carbon-intensive, trade-exposed industries may face a disproportionate impact within a unilateral carbon tax system. Policymakers could alleviate this burden through carbon tax revenue distribution or through a border adjustment mechanism. Both approaches may entail challenges in implementation.
Moreover, other stakeholders may advocate tax revenues be used to further other goals, including energy efficiency efforts or technology development. However, one revenue use necessarily forgoes the opportunity to apply that level of revenue to support other objectives.
Date of Report: April 2, 2013
Number of Pages: 45
Order Number: R42731
Price: $29.95
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