National Revenue and State Grants
Assumptions for Illustrative Carbon Fee
Revenue generation assumptions1
Revenue distribution assumptions
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 $)
|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
- 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.
- 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.
- 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.
- 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