Working Paper

Environmental Taxation

Jun 15, 2016 | Roberton C. Williams III

Summary

This paper evaluates the economic and environmental effects of potential environmental tax reforms, based on a review of recent economic research. It focuses mainly on a carbon tax but also considers changes to motor fuel taxes and energy tax credits.

Key Findings

  • Environmental tax rates in the United States are lower than in other industrialized nations, and much lower than economically efficient levels.
  • A carbon tax is a cost-effective way to reduce greenhouse gas emissions. The economically efficient carbon tax rate equals the social cost of carbon, currently estimated at $45 per ton and rising 1.5–2 percent faster than the rate of inflation.
  • A carbon tax would likely slow economic growth, but that effect is tiny, especially if the tax revenue is used in ways that promote economic growth. The tax would also be mildly regressive, though much less so than widely perceived.
  • Taxes on motor fuels are well below economically efficient levels, by roughly $1 per gallon. These taxes are somewhat regressive, but tax revenue could be used to offset that effect.
  • The energy tax credits examined have small environmental effects and are an expensive way to achieve those small effects. A carbon tax would provide far more environmental benefit, and in a much more cost-effective way.

Abstract

This paper examines potential environmental tax policy reforms. It focuses primarily on a carbon tax, but also more briefly considers a range of other possible changes. These include revising or eliminating various energy and environmental tax credits and deductions (many of which might become unnecessary in the presence of a carbon tax), as well as changes to energy taxes that have substantial environmental implications (such as the federal gasoline tax). The paper draws on recent theoretical and empirical research to evaluate the effects of such reforms on tax revenue, pollution emissions, economic efficiency, and income distribution.