Carbon taxes, deficits, and energy policy interactions

Abstract

The United States faces the challenge of bringing its federal budget deficit under control, while also reducing its greenhouse gas emissions. Current energy policy has not been very effective in reducing greenhouse gas emissions, although that has not necessarily been its sole purpose. And rather than raise revenue, much energy policy involves subsidies through the tax system that reduce revenue or regulatory policy that may indirectly reduce revenue through its effects on economic activity. This paper focuses on the role of a carbon tax as one option to raise revenue while also reducing greenhouse gases. We also examine the interaction with other regulatory policies, namely renewable portfolio standards, which have been implemented in many states, and the corporate average fuel economy standards.