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Proposal: Reduce Greenhouse Gas Emissions and Raise Revenue with Carbon Fees

Greenhouse gas emissions have harmful environmental, health, and financial effects. If you care about our economy and environment, then read on to explore a way to address these issues.

The Issue

Problem Defined

The US faces policy challenges from an unsustainable budget deficit, an inefficient tax and regulatory system, and the long-term threat of climate disruption. A carbon tax would generate revenue that could help reduce the deficit and fund reductions in other taxes, while helping address climate change. A major challenge is to design a carbon tax policy that is not regressive, i.e., one that does not burden lower-income households more than higher-income households as a percentage of household income.

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Greenhouse gas emissions are harmful to both the environment and public healthMORE

Greenhouse gas (GHG) emissions are responsible for numerous environmental problems. The emissions build up in the atmosphere and trap heat, warm the globe, raise sea levels, shift rainfall patterns, boost storm intensity, and increase the risk of sudden climate changes. Rising carbon dioxide concentrations alter the chemical balance of the oceans, harming coral reefs and other marine life. While the full range of potential impacts of climate change is still unknown, the evidence highly suggests that lower GHG emissions will cause fewer climate disruptions.

The World Health Organization reports that in 2012, air pollution exposure resulted in 7 million deaths – 1 out of 8 total global deaths. Pollution-caused diseases include heart disease, stroke, chronic obstructive pulmonary disease (COPD), and lung cancer.

Businesses and individuals are not held accountable for the pollution they generateMORE

Because most of the costs and dangers of rising greenhouse gas emissions are not directly borne by the businesses and individuals that use fossil fuels, they are often ignored when energy production and consumption choices are made.

Current climate-related policies are inefficient and costlyMORE

Several climate-related regulations are in place under the Environmental Protection Agency’s (EPA’s) Clean Air Act authority. However, the current policies aimed at tackling climate change (e.g., energy-efficiency standards, renewable electricity subsidies, and biofuel mandates) are inefficient and costly. 

Carbon fees would have significant financial benefit, irrespective of the environmental benefitsMORE

The current federal budget deficit is $435 billion. The rising costs of Medicare, Social Security, and defense spending are major contributors to the budget deficit problem. Reducing spending on these programs is politically unfeasible, so it is necessary to cut other spending or generate additional government revenue to offset these increases. Revenue from carbon taxes could be used to reduce the deficit.

The revenue from a carbon tax could also be used to offset other taxes. The reduction of certain taxes, such as corporate income taxes, could lead to greater economic growth.

Other countries are taking the lead in instituting carbon-reduction policiesMORE

According to the World Bank, around 40 countries/provinces have set up carbon taxes or emissions trading schemes.

A carbon tax imposes a greater burden on lower-income householdsMORE

It is assumed that producers will pass on the cost of a carbon tax to consumers in the form of higher prices. In general, lower-income households spend a higher percentage of their income on energy and other goods whose prices will go up under a carbon tax. This suggests a carbon fee will be regressive (more of the burden will fall to lower-income households than higher-income households as a percentage of income). The overall effect a carbon tax, however, depends heavily on how the revenue is used. A portion of the revenues raised can be used to increase social safety net programs for lower-income households.

Go deeper
Distributional Effects of a Carbon Tax in Broader US Fiscal Reform

Aparna Mathur and Adele C. Morris - The Climate and Energy Economics Project, Brookings (2012)


The paper analyzes the distributional implications of an illustrative $15 carbon tax imposed on carbon in fossil fuels. The authors analyze its incidence across income classes and regions, both in isolation and when combined with measures that apply the carbon tax revenue to lowering other distortionary taxes in the economy.

Carbon Taxes and Corporate Tax Reform

Donald Marron and Eric Toder - (2013)


This paper examines the pros and cons of using a carbon tax to help finance corporate tax reform. Its revenue would be much greater than corporate tax revenues, and can help finance lower corporate tax rates. This tax swap could reduce the environmental threats of carbon emissions and improve the nation's corporate tax system.

Social Cost of Carbon for Regulatory Impact Analysis - Under Executive Order 12866

Interagency Working Group, United States Government - (2010)


The “social cost of carbon” (SCC) is an estimate of the monetized damages linked to an incremental increase in carbon emissions in a given year. The purpose of these estimates is to allow government agencies to incorporate the social benefits of reducing carbon dioxide (CO2) emissions into cost-benefit analyses.

The Design of a Carbon Tax

Gilbert E. Metcalf & David Weisbach - Harvard Environmental Law Review (2009)


This paper covers the design of a tax on greenhouse gases. The purpose of such a tax is to force individuals to consider the consequences of climate-disruptive emissions. The authors show that a well-designed carbon tax can capture about 80% of US emissions by taxing only a few thousand taxpayers.

Carbon Tax Revenue and the Budget Deficit: A Win-Win-Win Solution?

Sebastian Rausch & John Reilly - (2012)


This analysis uses the MIT U.S. Regional Energy Policy (USREP) model to evaluate the effect of a carbon tax. The authors compare scenarios that include a carbon tax starting at $20 per ton in 2013, and find that, whether revenue is used to cut taxes or to sustain social programs, the economy is better off with a carbon tax.

EPA Analysis of the American Clean Energy and Security Act of 2009, H.R. 2454 in the 111th Congress

US Environmental Protection Agency (EPA) - (2009)


The analysis focuses on the economy wide cap and trade progam, the energy efficiency provisions, and the competitiveness provisions. It includes a focus on economy wide impacts involving greenhose gas emissions and economic costs, energy sector modeling results, and trade impacts. 

The Conservative Case for a Carbon Tax

Jerry Taylor - Niskanen Center (2015)


The author believes conservatives should embrace a carbon tax in return for elimination of the Environmental Protection Agency's (EPA's) regulatory authority over greenhouse gas emissions, elimination of green energy subsidies and regulatory mandates, and offsetting tax cuts to provide for revenue neutrality.

Electricity Net Generation: Total (All Sectors)

U.S. Energy Information Administration - (2015)


Included in the monthly Energy Review for October 2015, the table shows the sum (in million kilowatthours) of electricity generation from fossil fuels, nuclear electric power, hydro-electric pumped storage, and renewable energy, for the years 1950 to 2015. 

Expert Authors

AMERICAN ENTERPRISE INSTITUTE is a 501(c)3 public policy organization committed to expanding liberty, increasing individual opportunity and strengthening free enterprise through research and education on government, politics, economics and social welfare. It is regarded as one of the preeminent conservative think tanks in the US.

THE BROOKINGS INSTITUTION is a 501(c)3 public policy organization. Its mission is to conduct high-quality, independent research to provide innovative, practical recommendations that advance three broad goals: Strengthen American democracy; Foster the economic and social welfare, security and opportunity of all Americans; and Secure a more open, safe, prosperous and cooperative international system. It is consistently ranked as one of the most influential, most quoted and most trusted think tanks.

Aparna Mathur
Resident Scholar in Economic Policy - American Enterprise Institute

Aparna Mathur is a resident scholar in economic policy studies at the American Enterprise Institute (AEI). She received her Ph.D. in economics from the University of Maryland, College Park, in 2005. 

At AEI, her research has focused on income inequality and mobility, tax policy, labor markets, and small businesses. She has published in several top scholarly journals, testified several times before Congress, and published numerous articles in the popular press on issues of policy relevance. 

Her work has been cited in academic journals and leading news magazines such as the Economist, the Wall Street Journal, Financial Times, and Businessweek. Government organizations such as the Congressional Research Service and the Congressional Budget Office have also cited her work in their reports to Congress. 

She has been an adjunct professor at Georgetown University’s School of Public Policy and has taught economics at the University of Maryland.

Adele Morris
Senior Fellow and Policy Director for Climate and Energy Economics - The Brookings Institution

Adele Morris is a senior fellow and policy director for Climate and Energy Economics at the Brookings Institution. Her expertise and interests include the economics of policies related to climate change, energy, natural resources, and public finance.

She joined Brookings in July 2008 from the Joint Economic Committee (JEC) of the U.S. Congress, where she spent a year as a Senior Economist covering energy and climate issues. Before the JEC, Adele served nine years with the U.S. Treasury Department as its chief natural resource economist, working on climate, energy, agriculture, and radio spectrum issues. On assignment to the U.S. Department of State in 2000, she was the lead U.S. negotiator on land use and forestry issues in the international climate change treaty process. Prior to joining the Treasury, she served as the senior economist for environmental affairs at the President’s Council of Economic Advisers during the development of the Kyoto Protocol. She began her career at the Office of Management and Budget, where she conducted regulatory oversight of agriculture and natural resource agencies. She holds a Ph.D. in Economics from Princeton University, an M.S. in Mathematics from the University of Utah, and a B.A. from Rice University.

The Solution

Proposed Actions
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Charge a carbon tax of $16 per ton of carbon dioxide, rising 4% over inflation annually until 2050MORE

The price of the carbon tax should equal the social cost of carbon (SCC), or the present value of the environmental and social damages produced by each additional ton of CO2 emissions. It is difficult to measure the SCC, but useful benchmarks do exist, and $16 falls within their range. The $16 per metric ton of CO2 or CO2 equivalent translates to $0.16 per gallon of gas and $30 per ton of coal. 

The tax would be collected on carbon and other greenhouse gases at a strategic point in the distribution process, e.g., at refineries or wellheads. 

Eliminate redundant regulations and subsidiesMORE

A carbon fee will lower greenhouse gas (GHG) emissions and spur innovation in low-GHG technology, making other, less-efficient energy and environmental regulations and subsidies unnecessary. 

The Department of Energy could eliminate current energy standard regulations for dryers, air conditioners, lightbulbs, and refrigerators and instead just require manufacturers to provide the information to consumers. Since the tax would promote the market for energy-efficient vehicles and induce less driving, Congress could repeal the 2005 Renewable Fuel Standard. 

$6 billion in clean energy subsidies, such as renewable energy production credits and income tax credits for biodiesel fuel, could also be eliminated.

Use 11-15% of the carbon tax revenue for programs to benefit the poorest householdsMORE

Each year, 11-15%* of the carbon tax revenue would be used to bolster social safety net spending, to help offset the additional burden the tax would impose on lower-income households. 

* Note: Adele's Hamilton Project proposal recommends that 15% of the tax revenue going to programs for lower-income households, while your joint paper discusses directing 11% of the tax revenue to the poorest two deciles. Please let me know which number you'd like to include in the current proposal. 

Use the remaining 85-89% of carbon tax revenue to fund a reduction in corporate income taxesMORE

Use the remaining revenue to fund a permanent reduction in the top corporate income tax rate from 35% to 28%.

Expected Results
Expand all bullets
$815 billion in deficit reduction over 20 yearsMORE

The proposed carbon tax would raise approximately $88 billion in the first year and rise to almost $200 billion 20 years later, for a total of $1.1 trillion in the first decade and $2.7 trillion in revenue over 20 years.

Adding in the proposed subsidy reduction of $6 billion per year, the proposal would lead to a $200 billion reduction in the federal deficit in the first 10 years and a total of $815 billion in deficit reduction in the first 20 years. 

In the very long run, emissions will decline enough to reduce annual revenue, so other sources of revenue or spending reductions will be necessary to replace the revenue from the carbon tax.

12% reduction in greenhouse gas emissions in first 20 years and 33% reduction by 2050MORE

The policy would reduce taxed emissions relative to baseline by approximately 12% after 20 years, producing a cumulative reduction of 9.2 billion metric tons of CO2 in its first two decades.

With a present value of emissions reductions of $16 per ton, the first 20 years of the tax would produce at least $148 billion in climate benefits.

Economic growthMORE

This proposal would enable the US to implement more-efficient tax and regulatory policies. Revenue from the carbon tax will fund a permanent reduction in the statutory corporate income tax rate, currently the highest in the developed world, to a more internationally competitive level. Evidence suggests this tax swap will expand investment, spur innovation, and improve welfare.

Budget Impact

$815 billion deficit reduction over 20 years

Net Present Value

The Conversation

4 years ago
If the revenue can be used to offset the regressive-nature of the carbon tax, where do I fall in the picture? In some years I fall into the high income category and in some years I barely make any money. This tax plan has the potential to eat right through a struggling entrepreneur's personal finances.
4 years ago
I think the revenue should be used to support small businesses around the country because that's really who would suffer from a carbon tax. My small business may not pay a lot of taxes, but guess who does? I have a part-time job to help me fund my endeavors and being taxed for heating my home or driving my car is as much of a tax on my business as it is on me personally.
Andrew Guthridge
Board Chairman
4 years ago
Most Americans, Democrats and Republicans alike, would support a carbon tax if the revenue is used to fund research and development in green technology and alternative energy. So let's just use the revenue for that- we live in a democracy and the public has voiced its opinion.
Zack Mercer
4 years ago
A $16 tax (per ton) on greenhouse gas emissions is too high. I'm an auto mechanic, and a lower demand for cars that run on gasoline will put me out of my job.. How the heck can anyone fix a Tesla automobile? Those things are not real cars.
4 years ago
I pay taxes for many different programs (prison system, farm subsidies) and I'm not seeing positive results for any of them. Why should I expect the Carbon Tax to be any different? Let's just minimize the government's presence in the economy.
4 years ago
Let's fine polluters in a progressive tax scheme. The more a company pollutes, the more they pay per metric ton.
4 years ago
Can the carbon tax start out low and then be steadily increased over the course of a decade so people have time to properly adjust their lifestyles away from greenhouse gasses?
Richard Longacre
Vice President of Sales
4 years ago
I live close to a lake where many creatures look deformed and the population of wildlife has been steadily decreasing every 5 or 10 years. On my trip to Mongolia, I noticed how vibrant and healthy their ecosystem is. I think that anyone who doubts the impact of CO2 emissions on nature needs to visit Mongolia or Greenland to see what a natural ecosystem should look like.
4 years ago
How about we tax pollution directly? Companies would pay taxes any time they dump waste into the water. Could you imagine how much money we could have collected from BP?
Toby Trichter
4 years ago
Some studies suggest nuclear power can cause cancer. Is that type of radioactivity not considered pollution in the same sense that CO2 is?
Jackie Sanders
Kindergarten Teacher
4 years ago
I grew up in a big city and never really noticed how the car emissions had an impact on my health until I moved to Springfield. Now I can breathe better and I think it has an effect on my brain performance!
Sonya Haberdacker
Senior Planner
4 years ago
How about a higher carbon tax in states where pollution-related health problems and obesity levels are higher like Arkansas or Mississippi? I think that people will be more likely to walk or ride bicycles to avoid paying high gas prices.
Donald Hermann
Vice President of Marketing
4 years ago
Have there been studies in behavioral economics that conclude that raising the gas price will encourage people to walk or ride bicycles?
Charlie Fort
Senior Vice President of Production
4 years ago
My company makes solar panels and other products that run on solar energy. A tax on carbon will definitely help us compete against pollution-emitting giants that just pass off the environmental costs of their industry to the public.
Sarah Carter
4 years ago
Renewable energy won't prosper unless nuclear energy is also taxed. It may not be a source of greenhouse gas emissions but it's just as environmentally dangerous.
4 years ago
Where does nuclear energy fit in this issue? It's not a greenhouse gas, but it's not renewable energy either. Is it an alternative source of energy?

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