Almost all scientists agree that the Earth's climate is changing, having warmed by 0.6 to 0.8o Celsius (1.1 to 1.5o Fahrenheit) since the Industrial Revolution. Science indicates that the Earth's global average temperature is now approaching, or possibly has passed, the warmest experienced since human civilizations began to flourish about 12,000 years ago. During the 20th Century, some areas became wetter while others experienced more drought. Most climate scientists conclude that humans have induced a large part of the climate change since the 1970s. Although natural forces such as solar irradiance and volcanoes contribute to variability, scientists cannot explain the climate changes of the past few decades without including the effects of elevated greenhouse gas (GHG) concentrations resulting from fossil fuel use, land clearing, and industrial and agricultural emissions. Over the past 150 years, measured carbon dioxide concentrations have risen by more than one-third, from about 280 parts per million (ppm) to about 380 ppm. The United States contributes almost one-fifth of net global greenhouse gas emissions. Some impacts of climate change are expected to be beneficial (e.g., increased agricultural productivity in some regions), whereas others are expected to be adverse (e.g., drought in some regions, rising sea levels in some coastal areas). Forecasting future climate conditions is challenging, and some major processes remain poorly understood. However, methods are improving to characterize the risks. Scientists have found it is very likely that rising greenhouse gas concentrations, if they continue unabated, will raise the global average temperature above natural variability by at least 1.5o Celsius (2.7o Fahrenheit) during the 21st Century (above 1990 temperatures), with a small likelihood that the temperature rise may exceed 5oC (9oF). The projections thought most likely by many climate modelers are for a greenhouse gas-induced temperature rise of approximately 2.5 to 3.5oC (4.5 to 6.3oF) by 2100.

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.