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Taxing Carbon to Finance Tax Reform

In this issue brief, WRI and Duke Energy explain how instituting a carbon tax would simultaneously support federal tax reform initiatives, reduce carbon dioxide emissions, and promote sound energy policies.

Executive Summary

Reforming the federal tax code could advance economic growth as well as help the United States address a number of its environmental and energy challenges. A carbon tax, in particular, is an effective fiscal policy option that would simultaneously support federal tax reform initiatives, reduce carbon dioxide emissions, and promote sound energy policies.

  • A carbon tax is a consumption tax levied on the carbon content of oil, coal, and natural gas. Taxing the carbon content of these fossil fuels is an efficient means of assigning costs to the carbon dioxide emissions they release when burned for energy.
  • A carbon tax would be relatively easy to administer. It could be collected where fossil fuels enter the economy, such as ports, oil refineries, natural gas providers, and coal-processing plants. Applying the levy to as few as 2,000 entities could reach nearly all the fossil fuel consumed in the U.S. economy and would cover 82 percent of U.S. greenhouse gas emissions.
  • A carbon tax would generate significant revenue. According to the Congressional Budget Office, a tax of $12 per metric ton of carbon that gradually rises to $17 per metric ton of carbon would generate $208 billion in revenue over a ten year period.
  • Revenue from a carbon tax could be used to finance other tax reform initiatives. A carbon tax could be incorporated into a number of revenue-neutral tax reform packages, with the proceeds supporting reductions in inefficient existing taxes on productive labor and investment.
  • A carbon tax dovetails sound tax policy and sound climate change policy. Climate change policy in the United States would be most effective if it were federal, economy-wide, and market based. A carbon tax meets all these criteria. A tax that starts at a modest rate and increases gradually and predictably over time would establish incentives throughout the economy to reduce carbon dioxide emissions with minimal disruption. Moreover, by encouraging a less carbon-intensive economy, a carbon tax could help improve the nation’s long-term energy security.

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