Introduce a Carbon Tax at $25 per Ton

Among economists, a tax on greenhouse gas emissions like CO2 is viewed as an ideal policy solution to address climate change, although identifying the optimal rate is subject to uncertainty.

This option imposes a tax on US greenhouse gas emissions (carbon dioxide, methane, nitrous oxide, and fluorinated gases), including both energy-related and non-energy-related emissions. The tax is border-adjusted, so it exempts emissions from producing exports, while including emissions from purchasing imports.

The tax rate starts at $25 per ton of CO2 equivalent greenhouse gas emissions and rises by inflation plus 1 percent per year. We assume high noncompliance rates for areas where emissions may be difficult to measure, such as methane emissions from agriculture. Like other excise taxes, a carbon tax would primarily burden labor, reducing real, after-tax wages, hours worked, and economic output. These estimates only capture the effect of a carbon tax reducing after-tax returns to labor and do not account for environmental or other benefits, nor compliance or other costs.

On a conventional basis, this option would decrease the primary deficit by $1,099.6 billion over the budget window. Long-run GDP would fall by 0.2 percent, while long-run GNP would fall by 0.1 percent. On a dynamic basis, the primary deficit would decrease by $910.5 billion from 2027 through 2036, $189.1 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 172.8 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.5 percent. The top quintile of taxpayers and the bottom quintile of taxpayers would each experience a 0.5 percent decrease. On a long-run dynamic basis, taxpayers would see a 0.6 percent decrease on average.