2. How much revenue might a carbon tax raise?
The amount of revenue raised depends on the level of the tax, how broadly it is applied, and other factors. Most experts suggest a tax of around $25 per ton of CO2, which would raise approximately $125 billion annually. To put this in context with current considerations on other issues [1]:
- Eliminating the home mortgage interest deduction would raise an average of $120 billion annually from 2013 to 2017.
- Eliminating the tax deduction for employer payments for health insurance would raise an average of $337 billion annually from 2013 to 2017.
- Foregoing a “fix” to the Alternative Minimum Tax would save an average of $239 billion from 2013 to 2021.
- The Budget Control Act of 2011 imposes automatic cuts (“sequestration”) of $55 billion annually in defense spending and $36 billion in discretionary domestic spending from 2013 to 2021.
- Financing the current 2 percent reduction in payroll taxes paid by workers requires about $110 billion annually.
Related Publications
- RFF Issue Brief 12-03: The Variability of Potential Revenue from a Tax on Carbon
- Resources 176: Is a Carbon Tax the Only Good Climate Policy? Options to Cut CO2 Emissions
[1] References for these figures are as follows:
- Office of Management and Budget, Budget of the United States Government Fiscal year 2012, Analytical Perspectives, Table 17-1. Available at www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/teb2013.xls.
- Ibid.
- Urban-Brookings Tax Policy Center Microsimulation Model (version 0411-1). Available at www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3012.
- Congressional Budget Office, Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act, Table 1. Available at http://cbo.gov/publication/42754.
- JCT score for the 2-month extension passed in Dec 2011 available at https://www.jct.gov/publications.html?func=startdown&id=4376. 10-month extension passed in early 2012 available at https://www.jct.gov/publications.html?func=startdown&id=4399.
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3. How could a carbon tax affect the economy, employment, other taxes, and the deficit?
Various perspectives have been offered about how a carbon tax could affect the economy and in-depth analysis on this topic is currently underway at RFF. Experts generally agree that how the tax is designed and how revenues are used will be the largest determinants of the effects of the tax on the economy.
A carbon tax would increase the cost of fossil fuels, encouraging companies to switch to currently more expensive (albeit cleaner) fuels and leading households and companies to reduce energy use. These factors could make the economy less dependent on fossil fuels and thus less likely to be hurt by energy price shocks.
While a carbon tax could slow the growth of industries that emit large amounts of CO2, the tax could also boost other industries, particularly clean energy. A carbon tax could slightly reduce economy-wide employment due to lower demand for workers in carbon-intensive industries and weakened incentives for labor force participation (because the tax would lead to higher prices, reducing workers’ buying power).
A carbon tax could lead to overall economic growth, if the tax revenues are used in a way that promotes economic growth, such as cutting other taxes or reducing the deficit. Reducing personal and corporate income taxes would promote growth because these taxes distort employment, savings, and investment. The $125 billion in annual revenues from a $25/ton carbon tax could allow federal personal income tax reductions of about 15 percent or corporate income tax reductions of about 70 percent, if all carbon tax revenues were used to replace current tax revenues. Alternatively, the federal deficit could be reduced by approximately $1.25 trillion over 10 years—about the same reduction that the 2011 Joint Select Committee on Deficit Reduction would have had to agree on to avoid mandatory spending cuts. Other ways that the revenue could be used to promote growth include funding essential infrastructure, basic research, or investments in human capital. Any of these uses—funding tax cuts, deficit reduction, or productive government spending—could promote growth.
However, if revenue is not recycled in an efficient way, the annual costs of a $25/ton carbon tax would be substantially higher and could approach $50 billion, or about $90 per ton of CO2 reduced.
Related Publications:
- RFF Discussion Paper 11-02: Moving U.S. Climate Policy Forward: Are Carbon Taxes the Only Good Alternative?
- RFF Discussion Paper 12-27: Carbon Pricing with Output-Based Subsidies: Impact on U.S. Industries over Multiple Time Frames
- RFF Discussion Paper 03-46: Fiscal Interactions and the Case for Carbon Taxes over Grandfathered Carbon Permits
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4. Could higher energy prices hurt U.S. competitiveness? If so, what can be done about it?
A carbon tax could raise costs for industries that consume large amounts of energy, but some sectors are better positioned to recover the cost increases than others. In sectors that are both energy-intensive and exposed to international trade, such as metals and chemicals, product prices are driven by international market forces. Such industries could be disproportionately burdened if a carbon tax affects their operations but not those of their international competitors. Also, some environmental benefits could be eroded if increases in U.S. manufacturing costs cause economic activity and carbon emissions to “leak” to nations with weaker or nonexistent carbon-pricing policies (see question #9 for more information about carbon leakage).
Effects on industry (production and employment) depend on a number of factors, including the carbon intensity of producers, the degree to which they can pass costs to consumers, their ability to substitute with less carbon-intensive energy, the strength of competition from imports, and consumers’ ability to substitute other, less carbon-intensive alternatives.
Various policy options may help offset these impacts. For example, because these industries tend to be capital-intensive, lowering capital taxes or enhancing depreciation allowances could reduce their costs. However, these measures are not usually well-targeted. Another option is to reduce the burden of the carbon tax in these sectors. The challenge is to do so in a way that does not undo the incentives for reducing carbon intensity or seem to offer direct subsidies that violate World Trade Organization obligations.
Another option is to give firms a tax rebate based on their output. Per-output emissions above a sector-specific baseline would generate a tax liability, and emissions below the baseline would generate a refund. This would preserve most incentives for emissions reductions while reducing the overall tax burden. It makes the tax more complex, however, possibly creating opportunities for tax avoidance, rent seeking, or protectionism. This approach must be carefully designed and preferential treatment must be phased out as trade partners undertake their own climate regulations.
Related Publications:
- RFF Discussion Paper 10-47: The Impact on U.S. Industries of Carbon Prices with Output-Based Rebates over Multiple Time Frames
- RFF Discussion Paper 08-37: Impact of Carbon Price Policies on U.S. Industry
- Congressional Testimony, March 18, 2009: Competitiveness and Climate Policy: Avoiding Leakage of Jobs and Emissions
- RFF Discussion Paper 09-12: Combining Rebates with Carbon Taxes: Optimal Strategies for Coping with Emissions Leakage and Tax Interactions
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5. Could import and export adjustments level the playing field for U.S. industries?
One potential option for “leveling the playing field” is to implement carbon border adjustments—a tax levied on imported goods according to the emissions associated with their production. This would ensure that consumers pay for the carbon associated with the goods they purchase, regardless of where the goods were produced, and would encourage them to seek lower-carbon substitutes, as opposed to substitutes that have lower carbon prices. Energy-intensive exports to countries without climate policies could also receive a refund of carbon payments at the point of shipment. Adjustments for imports and exports could be combined, creating destination-based carbon pricing.
No countries currently apply carbon border adjustments to manufactured goods. Trade law is unclear about whether such measures would be legal, although many experts suggest they could be allowed if they are necessary to protect the integrity of the emissions regulation.
Related Publications:
- RFF Discussion Paper 09-02: Comparing Policies to Combat Emissions Leakage: Border Tax Adjustments versus Rebates
- RFF Climate Policy Forum Issue Brief 8: Addressing Competitiveness Concerns in the context of a Mandatory Policy for Reducing U.S. Greenhouse Gas Emissions
- RFF Discussion Paper 11-34: Cost-Effective Unilateral Climate Policy Design: Size Matters
- RFF Discussion Paper 12-19: Climate Policy and Fiscal Constraints: Do Tax Interactions Outweigh Carbon Leakage?
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6. Do other countries have a carbon tax, and if so, how are they using the revenue?
At least 10 countries currently have a carbon tax, along with a number of local and regional governments. These governments are using the revenue generated by carbon taxes in three general ways: investing in climate mitigation programs, offsetting revenue to lower taxes in other areas, or as general government income.
Table 1. Countries with Carbon Taxes
Country Year Implemented Finland 1990 Netherlands 1990 Norway 1991 Sweden 1991 Denmark 1992 Costa Rica 1997 United Kingdom 2001 Switzerland 2008 Ireland 2010 Australia 2012
Table 2. Other Governments with Carbon Taxes
Country Year Implemented Quebec, Canada 2007 Boulder, Colorado, USA 2007 Bay Area Air Quality Management District, California, USA 2008 British Columbia, Canada 2008
Related Publications:
- RFF Discussion Paper 11-46: The Promise and Problems of Pricing Carbon: Theory and Experience
- RFF Policy Commentary, March 21, 2011: A Carbon Price for Australia: From Tax to Trading
- RFF Discussion Paper 08-26: A Tax-Based Approach to Slowing Global Climate Change
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