The Fiscal Implications of the US Transition away from Fossil Fuels
An article published by the Review of Environmental Economics and Policy finds that, between 2015 and 2020, fossil fuels generated roughly $138 billion each year for US localities, states, tribes, and the federal government.
The need to reduce greenhouse gas emissions requires curtailing coal, oil, and natural gas production and consumption. However, these fuels are major revenue sources for governments. Here, we develop a novel estimate of the revenues generated by fossil fuels for all governments in the United States. Then we estimate how those revenues change under three stylized scenarios through 2050. The first is business as usual (BAU), without further controlling emissions. The second is to limit the increase in global average temperature to 2°C. The third and most ambitious climate goal is to limit the increase to 1.5°C. We estimate that fossil fuels generate $138 billion annually for US governments. Although revenues decline under all three scenarios, they fall more quickly under the ambitious climate policy. Taxes on refined petroleum products are the largest source of revenue and decline under all scenarios. Oil and gas production is the second largest and is relatively stable under the BAU and 2°C scenarios but declines rapidly under the 1.5°C scenario. Under all scenarios, coal revenues decline rapidly, approaching zero by 2040 under the 1.5°C and 2°C scenarios. These revenue shortfalls will be concentrated in certain regions. At the same time, recent estimates of climate damages easily exceed the revenue losses described in this analysis. This highlights the need for policy makers to adopt emissions-reduction strategies and also address revenue shortfalls. The policy tools to accomplish both goals are relatively straightforward. However, implementing them will require overcoming considerable political challenges.
Daniel Raimi is a fellow and director of the Equity in the Energy Transition Initiative at RFF. He works on a range of energy policy issues with a focus on tools to enable an equitable energy transition.
Georgia Institute of Technology
Environmental Defense Fund
Gilbert E. Metcalf
Gilbert E. Metcalf is a university fellow at RFF. His current research focuses on policy evaluation and design in the area of energy and climate change.
Formerly Resources for the Future
Harrisburg University of Science and Technology
Working Paper — Jan 13, 2022
The Fiscal Implications of the US Transition Away from Fossil Fuels
This working paper estimates the fiscal risk posed by the energy transition for governments dependent on fossil fuels, while examining policies to address this risk to revenues.
Press Release — Jan 13, 2022
US Revenues from Fossil Fuels, Responsible for $138 Billion Annually, Expected to Fall Regardless of Climate Action
Fossil fuels provide substantial revenue to the US federal government and many states, tribes, and localities—but changes to government tax policies can help replace declining revenue and help communities adapt.
Resources Radio — Feb 13, 2024
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