Using a Carbon Tax to Decrease the Deficit

A carbon tax would provide an incentive to reduce the use of fossil fuels, fostering the growth of clean energy.  But it would have another benefit as well: providing revenue to help cut the deficit. Much the same effect could be produced by auctioning allowances within a cap-and-trade system.

According to Resources for the Future, a carbon tax of $10 per ton of CO2 could generate annual tax revenues of $60 billion, and a carbon tax of about $25 could raise roughly $125 billion per year.  The amounts are uncertain in part because the tax revenue is sensitive to the price of natural gas — low natural gas prices drive out coal and reduce revenue from the carbon tax. Regardless, the potential for deficit reduction is significant.

The distributive impact of a carbon tax raises some issues.  Because low-income consumers spend more of their income on energy and energy-intensive goods, a carbon tax is regressive.  Also, there are regional disparities, depending primarily on how much electricity is generated by coal.  Thus, it may make sense to use some of the tax proceeds to reduce burdens on the most heavily affected groups, although this would reduce the net revenue from the tax.

In the long run, the carbon tax should produce decreasing revenue as reliance on fossil fuels wanes. But in the shorter-run, the tax could be a significant plus in terms of deficit reduction.

 

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Reader Comments

4 Replies to “Using a Carbon Tax to Decrease the Deficit”

  1. The primary problem that I see with a carbon tax is that you would have to set it very high to achieve meaningful reductions in greenhouse gas emissions, probably at least $50/ton, which would probably not be tenable politically. At the $10-25 level, you wouldn’t effectuate much, if any technological innovation, de minimis reductions in emissions, and you’d then face the political backlash of having raised fuel prices without achieving climate policy goals.

  2. The primary problem that I see with a carbon tax is that you would have to set it very high to achieve meaningful reductions in greenhouse gas emissions, probably at least $50/ton, which would probably not be tenable politically. At the $10-25 level, you wouldn’t effectuate much, if any technological innovation, de minimis reductions in emissions, and you’d then face the political backlash of having raised fuel prices without achieving climate policy goals.

  3. Dear moderator,
    Please disregard my previous post. I was merely drawing an appropriate analogy in a well-meaning attempt to contribute to the discussion. Nothing I said was off-topic or intentionally offensive. As previously noted by others on this forum, gay rights and environmentalism are closely associated.

  4. Dear moderator,
    Please disregard my previous post. I was merely drawing an appropriate analogy in a well-meaning attempt to contribute to the discussion. Nothing I said was off-topic or intentionally offensive. As previously noted by others on this forum, gay rights and environmentalism are closely associated.

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About Dan

Dan Farber

Dan Farber has written and taught on environmental and constitutional law as well as about contracts, jurisprudence and legislation. Currently at Berkeley Law, he has al…

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