A US Carbon Tax: Rationales and Impacts Lawrence H. Goulder Stanford University

Rationales for a Carbon Tax Relatively low-cost instrument for reducing greenhouse gas emissions Helps bring about equal marginal abatement costs across emitters (cf. traditional regulation) Compared with cap and trade, it avoids emissions-price volatility It yields revenue that (in principle) could be put to beneficial use finance cuts in other, distortionary taxes revenue-neutral policy -> cut taxes contemporaneously revenue-raising policy -> cut deficit and reduce need to raise future taxes finance new government expenditure

Estimated Marginal External Cost (“Social Cost of Carbon”)

Carbon Taxes Elsewhere

Potential Revenues of $20/ton Carbon Tax Source: Congressional Budget Office (2012)

How Should It Be Designed? Relatively upstream Accounting for carbon in imported fuels Including a credit for captured carbon

Welfare Cost per Ton of CO 2 Avoided Equivalent Variation Carbon tax of $33/ton in 2020 (implies 8.5 % reduction in CO 2 ) Source: Parry and Williams – Resources for the Future (2012)

Sector Impacts b Percentage change in the present value of profits over the interval c Percentage change in the present value of GDP over the interval Source: Goulder, Hafstead, and Dworsky (2010)

Source: Marron and Toder – Urban Inst. (2012)

Conclusions Properly scaled carbon tax can yield efficiency gains Revenues from reasonably scaled tax are large enough to finance several proposed tax cuts Policy costs are much lower when revenues are recycled through cuts in marginal tax rates Economic impacts: large share of cost is passed on to consumers impacts on producers are concentrated on fossil fuel suppliers industries that intensively use fossil-based fuels