An economy-wide federal carbon tax can significantly reduce US carbon dioxide emissions but will also impact the US economy. A modeling exercise examines these macroeconomic impacts and demonstrates the effects of the tax on consumer prices and welfare.
- A carbon tax can substantially reduce carbon emissions at a relatively low cost.
- How the carbon tax revenue is used matters. Using the revenues to reduce existing taxes, such as the corporate income tax, significantly reduces the cost of the policy compared to lump-sum rebating of the revenues to households.
- The welfare cost per ton of carbon dioxide reduced is significantly below central estimates of the social cost of carbon when the carbon tax revenues are used to reduce corporate income taxes.
- Based on our estimates, using carbon tax revenues to reduce corporate income taxes would pass a cost–benefit test by a significant margin.