Lawmakers could also offset some of the negative economic effects of a carbon tax by using the revenues to reduce the existing marginal rates of income or payroll taxes-a policy known as a tax swap. Using the Revenues to Cut Marginal Tax Rates Would Also Decrease Total Costs Thus, policies that reduce deficits generally have a positive effect on the economy in the long run (although they can have a negative effect in the short term when the economy is weak). Federal budget deficits tend to result in lower economic output over the long run than would otherwise be the case, by crowding out private-sector investment. Using the Revenues to Reduce Deficits Would Decrease the Tax’s Total Costs to the EconomyĪt least part of the negative economic effect of a carbon tax would be offset if the tax revenues were used for deficit reduction. Some uses of those revenues could substantially offset the total economic costs resulting from the tax itself, whereas other uses would not. Lawmakers’ choices about how to use the revenues from a carbon tax would help determine the tax’s ultimate impact on the economy. How Would Various Uses of the Revenues From a Carbon Tax Alter Its Economic Effects? Finally, areas of the country where electricity is produced from coal-the most emission-intensive fossil fuel per unit of energy generated-would tend to experience larger increases in electricity prices than other areas would. Similarly, workers and investors in emission-intensive industries, who would see the largest decrease in demand for their products, would be likely to bear relatively large burdens as the economy adjusted to the tax. For example, the additional costs from higher prices would consume a greater share of income for low-income households than for higher-income households, because low-income households generally spend a larger percentage of their income on emission-intensive goods. The costs of a carbon tax would not be evenly distributed among U.S. Investment would also decline, further reducing the economy’s total output. Lower real wages would have the net effect of reducing the amount that people worked, thus decreasing the overall supply of labor.

The higher prices it caused would diminish the purchasing power of people’s earnings, effectively reducing their real (inflation-adjusted) wages. Without accounting for how the revenues from a carbon tax would be used, such a tax would have a negative effect on the economy. Higher production costs would also lead to higher prices for emission-intensive goods and services, which would encourage households to use less of them and more of other goods and services. Those cost increases would provide an incentive for companies to manufacture their products in ways that resulted in fewer CO 2 emissions. How Would a Carbon Tax Directly Affect the Economy?īy raising the cost of using fossil fuels, a carbon tax would tend to increase the cost of producing goods and services-especially things, such as electricity or transportation, that involve relatively large amounts of CO 2 emissions. emissions of CO 2 would be about 8 percent lower over that period than they would be without the policy, CBO estimated. For example, in 2011, CBO estimated that a cap-and-trade program that would have set a price of $20 in 2012 to emit a ton of CO 2 (and increased that price by 5.6 percent each year thereafter) would raise a total of nearly $1.2 trillion during its first decade. Those analyses suggest that a carbon tax that covered the bulk of CO 2 emissions or the carbon content of most fossil fuel consumed in the United States could generate a substantial amount of revenue. However, CBO has extensively analyzed policies, known as cap-and-trade programs, that would similarly set a price on CO 2 emissions. Neither CBO nor the staff of the Joint Committee on Taxation has published an estimate of how much revenue a carbon tax might produce. How Much Revenue Could a Carbon Tax Raise? This study examines how a carbon tax, combined with those alternative uses of the revenues, might affect the economy and the environment. Options include using the revenues to reduce budget deficits, to decrease existing marginal tax rates (the rates on an additional dollar of income), or to offset the costs that a carbon tax would impose on certain groups of people. economy would depend on how the revenues from the tax were used. Emissions of CO 2 and other greenhouse gases accumulate in the atmosphere and contribute to climate change-a long-term and potentially very costly global problem. Lawmakers could increase federal revenues and encourage reductions in emissions of carbon dioxide (CO 2) by establishing a carbon tax, which would either tax those emissions directly or tax fuels that release CO 2 when they are burned (fossil fuels, such as coal, oil, and natural gas).

World carbon tax