Carnegie Mellon University

Medical care team

New Bottom-Line Benefits of Taxing Emissions

By Nicholas Z. Muller Associate Professor of Economics, Engineering, and Public Policy; Lester and Judith Lave Development Chair in Economics, Engineering, and Public Policy

Reducing carbon dioxide emissions helps to stabilize the climate and avoid future impacts from global warming. Taxing emissions could also provide significant benefits to the U.S. government's fiscal position.

A recent study by authors from Carnegie Mellon University found that modest carbon taxes on polluters in the U.S. could offset personal income taxes by 15 to 30 percent. The analysis showed that taxing carbon emissions would produce up to half a trillion dollars in carbon tax revenue per year.

The amount and the enduring nature of carbon tax revenue staggered us. It is an incredibly important result that should be part of the dialogue about fiscal policy.

Swapping out an income tax for a carbon tax makes a lot of sense for the economy and for government budgets. It gives us a huge new revenue stream that would also improve the efficiency of the economy. And carbon taxes stimulate economy-boosting innovation in new technologies to produce the kind of emission reductions policymakers are looking for. Income taxes, on the other hand, reduce the incentive to work, which adversely affects the economy.

Various economic sectors differ in emission levels and responsiveness to carbon taxes. Those with the highest emissions are electricity production and transportation. The electric sector is also among the most responsive to carbon taxes in terms of developing low-carbon technologies like wind and solar. Over time it would contribute less in tax revenue than medium and heavy-duty transportation — as well as other sectors we studied — that run predominantly on fossil fuels and lag in innovations to reduce emissions.

Though they are less responsive to the incentives presented by carbon taxes, these sectors would be significant sources of CO2 tax revenue. Potentially constructive uses of the carbon tax revenues include infrastructure repair, alleviating income taxes as noted above, and tax offsets to mitigate income inequality.

The study explored carbon tax rates ranging from $35 to $100 per ton. Deep uncertainties in the climate system and its impact on human civilization means that we don't know with certainty what the exact rate should be. However, we demonstrate that, given these unknowns, it's better for the economy to tax on the high end than the low end. This is an example of the precautionary principle.

This kind of interdisciplinary research — exploring economics, public policy, and systems analysis — is at the core of what we do. Working with experts across Carnegie Mellon, we're tackling this and other sustainability questions from all directions.