The federal budget deficit has exceeded $1 trillion annually in
each fiscal year since 2009, and deficits are projected to
continue. Over time, unsustainable deficits can lead to reduced
savings for investment, higher interest rates, and higher levels of
inflation. Restoring fiscal balance would require spending
reductions, revenue increases, or some combination of the two.
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 112th Congress. 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 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. One study
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. For example,
this estimated revenue source would reduce the 10-year budget
deficit by 50%, using the 2012 baseline projection of the
Congressional Budget Office (CBO). However, under CBO's alternative
fiscal scenario, the same carbon tax would reduce the 10-year
budget deficit by about 12%. When deciding how to allocate
revenues, policymakers would encounter key trade-offs: 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 trade concerns.
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