The Economics

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National Revenue and State Grants

Assumptions for Illustrative Carbon Fee

Revenue generation assumptions1

  • The carbon tax rate: We analyze the impact of tax on GHG emissions that begins at $25 per metric ton of CO2-equivalent emissions in the first year. The per-metric ton tax rate increases each subsequent year by 2 percent over inflation.
  • Scope of coverage: The illustrative tax applies across the economy to nearly all energy-related CO2 emissions, as well as some non-CO2 emissions from large manufacturing facilities. Land-use and other non-point emissions are excluded.

Revenue distribution assumptions

  • Distribution of revenue: Revenue from the carbon tax is divided between states and the federal government on a 75/25 percent basis.
  • Apportionment of funds to states: Here we apply a formula that tracks with both the potential burden of the carbon tax and the size of each state. We take the average of two factors as of 2014: 1) the state’s share of total U.S. GHG emissions that are covered by the tax (based on 2014 emissions published by the Energy Information Administration); and 2) the state’s share of total U.S. population (based on 2010 U.S. census data). The shares of revenues to each state in this multi-factor approach appear in Table B-1 in Appendix B.

Placing a modest fee of $25 per ton on carbon emissions can raise nearly $1 trillion in new revenue over the first ten-years of the program. More than $750 billion of these funds would be returned to states in the form of block grants. A year-by-year summary of is provided in Table 1.

Overall, the fee would reduce emissions by 8% over the first decade of the program. The decrease from business-as-usual levels would be even higher. Revenues, on the other hand, would increase annually owing to the escalation of the carbon tax rate (see Figure 2).

These results show that states stand to gain substantial revenue even from a modest carbon tax trajectory as illustrated here, which arguably represents the lower end of carbon price paths legislators would consider. The estimated average grant in the first year of the program is $1.32 billion. The smallest grant, to Vermont, would equal about $100 million. Texas would receive the largest payout—$6.7 billion in the first year. Approximately $22 billion would be available to the federal government in the first year. Full results from this analysis are shown in Table B-2 in Appendix B.

Even under the relatively low carbon price used for the purpose of this exercise, the sizable funds returned to states in each of the first ten years of the program represent much-needed revenue that can help fill important gaps in states’ operating budgets. For example budget shortfalls are forcing the governor of Wyoming to propose spending cuts of nearly $250 million for the 2017-18 biennium, including a 9% cut to the budget of the Department of Health.2 At $460 million, Wyoming’s first year carbon grant would equal 170% of the state’s current health-related spending. In Kentucky, a $500 million revenue shortfall is resulting in 4.5% cuts in higher education spending over the next two years.3 In our example, Kentucky’s first-year carbon grant would represent more than 14% of the state’s current education spending. And Illinois, which may see a $5 billion budget deficit in 20174, stands to gain more than $3 billion from a carbon grant annually. This sum is equivalent to about 7% of its current tax revenue.

Table 1: Summary of Revenue and Grants (bn nominal $)

Year: 1 2 3 4 5 6 7 8 9 10 Total
Total Projected Revenue 88 90 94 97 99 101 105 108 112 115 1008
Grants to States 66 68 70 72 74 76 78 81 84 86 756
Reserved by Federal Government 22 23 23 24 25 25 26 27 28 29 252

Source for projected carbon tax revenues: CBO, 2016

  1. The structure of the carbon tax—value and coverage—is based (with some adaptations) on the Congressional Budget Office’s 2016 analysis of options for reducing the federal budget deficit. The tax on GHG emissions is option no. 42, https://www.cbo.gov/budget-options/2016/52288.
  2. Murphy, M. (2016). Gov. Matt Mead says $248 million in budget cuts “painful”. Wyoming Tribune Eagle. 22 June. Available at: http://www.wyomingnews.com/news/gov-matt-mead-says-million-in-budget-cuts-painful/article_de550638-383b-11e6-96bc-73824251ca58.html.
  3. Barton, R. (2016). Kentucky Lawmakers Reach Budget Deal; Over $1 Billion For Pensions. WFPL News. 14 April. Available at: http://wfpl.org/compromise-budget-makes-cuts-puts-money-pensions.
  4. McKinney, D. (2016). Illinois sees $13 billion bill backlog, $5 billion budget deficit in 2017. Reuters. 16 November. Available at: http://www.reuters.com/article/us-illinois-budget-idUSKBN13B2OZ
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On March 27, 2017

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