Policymakers have considered a number of options for raising additional federal revenues (see the text box below). Two concurrent resolutions introduced in the House ( H.Con.Res. A tax based on carbon content of fuels is different from a tax based on energy content, such as a Btu tax (see the text box below). Design and Implementation

When establishing a carbon tax, there are several implementation decisions to be considered. The point of taxation does not necessarily reveal who bears the cost of the tax, as the cost may be passed on to intermediate producers or consumers. Rate of Taxation

Although setting the carbon tax rate would likely involve political considerations, several economic approaches could be used to inform the debate. For example, Congress could set a tax rate based on the estimated benefits associated with avoiding climate change impacts. The following sections analyze a generic carbon tax option using the criteria listed below:
adequacy— the ability to generate a desired amount of revenues; economic efficiency— the potential to enhance or diminish the productivity of the U.S. economy; equity— the subjective determination of a proposal's fairness; o perability— the combination of multiple factors, including administrative ease, transparency, avoidance of perverse outcomes, and consistency with federal and international norms and standards; and political feasibility— the likelihood of enactment given a tax's visibility to the public and public opinion, differential regional implications, contribution to deficit reduction or other objectives, pledges made by some lawmakers not to raise taxes, etc. Adequacy—the Potential to Generate Revenues

The revenues that would be generated under a carbon tax vary greatly depending on the design features of the tax, namely the tax scope (i.e., base) and rate, as well as such independent factors as prices in global energy markets. Economic Efficiency

Economic theory suggests that a carbon tax could improve the efficiency of the economy by at least three means:
first, markets could produce a more optimal mix of goods and services if the costs of emitting GHG while manufacturing products, providing services, or using goods were "internalized" into market prices; producers and consumers would more fully respond to the full costs of their decisions, resulting in a more economically efficient outcome; second, a tax on an activity that yields pollutants, such as GHG emissions, would discourage the polluting activity and therefore could be more efficient than an alternative tax that yields the same revenues but discourages a beneficial activity (e.g., investment); and third, adding a smaller tax on a new activity, such as potential carbon emissions, could be less distortionary to production and consumption than increasing the tax rate on currently taxed activities. Under CBO's alternative fiscal scenario, the same carbon tax would have a smaller impact on budget deficits. However, one revenue use necessarily forgoes the opportunity to apply that level of revenue to support other objectives, like deficit reduction. Therefore, in deciding how to allocate carbon tax revenues, policymakers would encounter trade-offs among objectives. Distribute Carbon Tax Revenues to Households

If Congress were to consider a carbon tax system, a key debate would likely involve the degree to which carbon tax revenues would be returned to households to alleviate the expected financial burden imposed by the carbon tax. Economic studies indicate that using carbon tax revenues to offset reductions in distortionary taxes—labor, income, and investment—would be the most economically efficient use of the revenues and yield the greatest benefit to the economy overall. Assist Carbon-Intensive, Trade-Exposed Industries

Carbon-intensive, trade-exposed industries would likely face disproportionate impacts within a U.S. carbon tax system. Concluding Observations

Carbon taxes, or fees on emissions of some or all GHG emissions, have been proposed for many years by economists and some Members of Congress. In addition, specific industries may experience disproportionate impacts.
In the context of budget deficit and fiscal policy debates, 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 113th Congress. However, based on concerns regarding the potential negative economic impacts of a carbon tax, some Members have introduced concurrent resolutions opposing a carbon tax.
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 ultimately 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. A study from the Congressional Budget Office (CBO) 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.
When deciding how to allocate revenues, policymakers would encounter key trade-offs, such as 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 challenges in implementation.
Moreover, other stakeholders may advocate tax revenues be used to further other goals, including energy efficiency efforts or technology development. However, one revenue use necessarily forgoes the opportunity to apply that level of revenue to support other objectives.