Taxing Carbon to Finance Tax Reform

By Craig Hanson and James R. Hendricks Jr.
Washington, DC (January 1, 2006)- In this issue brief, the World Resources Institute and Duke Energy explain how instituting a carbon tax would simultaneously support federal tax reform initiatives, reduce carbon dioxide emissions, and promote sound energy policies. Reforming the federal tax code could advance economic growth as well as help the United States address a number of its environmental and energy challenges.


A carbon tax is a consumption tax levied on the carbon content of oil, coal, and natural gas. Taxing the carbon content of these fossil fuels is an efficient means of assigning costs to the carbon dioxide emissions they release when burned for energy.
A carbon tax would be relatively easy to administer. It could be collected where fossil fuels enter the economy, such as ports, oil refineries, natural gas providers, and coal-processing plants. Applying the levy to as few as 2,000 entities could reach nearly all the fossil fuel consumed in the U.S. economy and would cover 82 percent of U.S. greenhouse gas emissions.
A carbon tax would generate significant revenue. According to the Congressional Budget Office, a tax of $12 per metric ton of carbon that gradually rises to $17 per metric ton of carbon would generate $208 billion in revenue over a ten-year period.
Revenue from a carbon tax could be used to finance other tax reform initiatives. A carbon tax could be incorporated into a number of revenue-neutral tax reform packages, with the proceeds supporting reductions in inefficient existing taxes on productive labor and investment.
A carbon tax dovetails sound tax policy and sound climate change policy. Some advocates argue that the resulting policy must be federal, economy-wide, and market based. A carbon tax meets all these criteria.
About the Green Fees Initiative
The federal tax code can have a significant impact on the environment. Fiscal policy is used to encourage as well as discourage various business activities and consumer decisions. These activities affect the environment and human health by influencing how much we consume, how we use natural resources, and how much pollution is released into our air and water.
The President’s recent call for tax reform and the presence of persistent budget deficits provide opportunities for policy makers to consider changes to the federal tax code that could lead to not only greater fiscal responsibility, but also improved human and environmental health.
The World Resources Institute’s Green Fees initiative seeks to identify and analyze a portfolio of tax reforms that would be both fiscally prudent and environmentally sound. WRI and partners will educate policymakers, interest groups, and opinion leaders in order to build support for these measures.
The portfolio of reforms WRI will address include:
* Eliminating existing tax expenditures that forego revenue and that encourage activities reducing the quality of our air, the cleanliness of our water, and the abundance of our natural resources;
* Introducing environmental charges on pollution and waste to discourage environmental degradation, stimulate technological innovation, and improve the federal budget situation.
For more information, visit the World Resources Institute.