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CBO: Effects of a Carbon Tax on the Economy and the Environment

By raising the cost of using fossil fuels, a carbon tax would tend to increase the cost of producing goods and services—especially things, such as electricity or transportation, that involve relatively large amounts of CO2 emissions.

The costs of a carbon tax would not be evenly distributed among U.S. households. For example, the additional costs from higher prices would consume a greater share of income for low-income households than for higher-income households, because low-income households generally spend a larger percentage of their income on emission-intensive goods. Similarly, workers and investors in emission-intensive industries, who would see the largest decrease in demand for their products, would be likely to bear relatively large burdens as the economy adjusted to the tax. Finally, areas of the country where electricity is produced from coal—the most emission-intensive fossil fuel per unit of energy generated—would tend to experience larger increases in electricity prices than other areas would.

The higher prices resulting from a carbon tax would tend to be regressive—that is, they would impose a larger burden (relative to income) on low-income households than on high-income households.

Acting on its own, the United States could have only a modest effect on the amount of warming. In particular, efforts to limit global warming are likely to require significant reductions in emissions by rapidly growing economies, such as those of China and India.

some of the decrease in U.S. emissions resulting from a federal carbon tax would be offset by increases in emissions overseas—a phenomenon known as carbon leakage.

Given the inherent uncertainty of predicting the effects of climate change, and the possibility that it could trigger catastrophic effects, lawmakers might view a carbon tax as a reflection of society’s willingness to pay to reduce the risk of potentially very expensive damage in the future.