Macroeconomic Analysis of Federal Carbon Taxes
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.
Marc Hafstead is an RFF fellow and director of the Carbon Pricing Initiative and the Climate Finance and Financial Risk Initiative.
Raymond J. Kopp
Raymond J. Kopp is a senior fellow at RFF. During his career Kopp has specialized in the analysis of environmental and natural resource issues with a focus on Federal regulatory activity.
On the Issues — Jan 19, 2024
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2023 Year in Review: Energy and Environmental Policy, with Karen Palmer and Joseph Majkut
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Working Paper — Dec 18, 2023
Widening the Scope: The Direct and Spillover Effects of Nudging Water Efficiency in the Presence of Other Behavioral Interventions
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