Carbon Taxes
Ian Parry, Fiscal Affairs Department
International Monetary Fund
Roberton Williams,
University of Maryland, RFF
Disclaimer: The views expressed
herein are those of the author
and should not be attributed to
the IMF, its Executive Board, or
its management.
Overview
• Provide broad sense of how
costs of carbon tax depend on
how revenues are used (Ian)
• Discuss revenue recycling
options in more detail (Rob)
Focus on carbon tax on fossil fuel
emissions scaled to projected
emissions prices under capand-trade proposals
(intermediate assumption
about offsets).
Focus on 2020. According to
RRF-NEPI study
• CO2 price: $33 per ton
• Fossil fuel CO2 emissions
reduction: 8.5% (0.5 billion
tons)
• Revenues: $180 billion
Figure 1. Carbon Tax Revenue as %
of Projected Federal Budget Deficit
30
25
20
15
10
5
0
2012
2014
2016
Source. CBO (2010), RFF-NEPI (2010).
2018
2020
Within the energy sector, the
average cost in 2020 would
be approximately $16 per
ton.
Cost also depends on how it
affects distortions from
broader tax system.
US Tax System Causes 3 Large
Distortions
1. In labor market income/payroll
taxes reduce hours worked.
Increases/decreases in
employment generate economic
benefit/cost.
2. Taxes on savings/investment
reduce capital accumulation.
3. Tax preferences causes
excessive spending on e.g.,
employer medical insurance,
home ownership.
Implications
Large economic benefits from using
carbon tax revenues to reduce
personal income taxes (directly or
indirectly).
Recycling $180 billion in produces
benefits of approx. $50 billion, or
$100 per ton of CO2 reduced.
But offsetting effect
Carbon taxes →
higher energy prices →
contract economic activity →
reduction in employment
Effects of Carbon Taxes on Work
Effort
Approximately 0.3% reduction if
revenues not used to cut income
taxes.
Approximately a wash if revenues
used to cut income taxes.
But ‘Double Dividend’
Costs of reduced employment
from higher energy prices may
be less than
Benefits from cutting income
taxes--increased employment
and reduced distortions from
tax preferences
Average Cost of Carbon Tax per ton of CO2
Reduced
100
Carbon tax/cap-and-trade
with no revenue
recycling benefit
80
$/ton
60
40
20
0
Carbon tax/cap-and-trade
with revenue
recycling benefit
-20
Source. Parry and Williams (2011).
Average Cost of Carbon Tax per ton of CO2
Reduced
100
80
$/ton
60
40
20
0
-20
Source. Parry and Williams (2011).
CO2 per kWh standard