This paper explores a specific approach to carbon pricing, called “Price and Block Grant,” where the federal government prices carbon and states take the lead in spending decisions.
Under the proposal, U.S. states receive the majority of revenue in the form of block grants. The balance is reserved for reducing federal taxes or funding select new federal spending. The Price and Block Grant approach allows the U.S. to address key national and state priorities without massively increasing the federal budget deficit.
Price and Block Grant has a number of benefits:
- It builds on the strength of the U.S. federalist system. A federally imposed price ensures that the policy is harmonized across the U.S. economy. Meanwhile, grants to states maximize economic and social benefits by allowing state governments to tailor spending to best match their unique needs.
- It raises much-needed revenue. Price and Block Grant could go a long way toward paying for infrastructure and tax reform—the top two priorities of the Donald Trump administration. Even a modest $25 per tonne fee increasing at 2% annually would generate at least $1 trillion over its first decade (Figure ES-1). More than $750 billion would be distributed to states under a 75/25 revenue-sharing program.
- It is an efficient way to reduce U.S. emissions. Experts on both sides of the ideological spectrum agree that pricing carbon and other GHGs is likely the most efficient way to reduce emissions. It is also far more cost-effective than top-down regulations such as the Clean Power Plan.
This carbon pricing approach represents an enormous new revenue stream while remaining consistent with conservative principles of limited government and local control. It eschews top-down federal regulations in favor of a market-based approach, promotes efficient and sound environmental policy and puts local actors in charge of key spending decisions. It is simply smart policy.
Figure ES-1: Revenue and GHG Emissions under Illustrative Carbon Price