Designing a Carbon Tax to Reduce U.S. Greenhouse Gas Emissions

Abstract

This article describes a revenue and distributionally neutral approach to reducing U.S. greenhouse gas emissions that uses a carbon tax. The revenue from the carbon tax is used to finance an environmental earned income tax credit designed to be distributionally neutral. The credit is linked to earned income and helps offset the regressivity of the carbon tax. The carbon tax reform proposal is also revenue neutral and avoids conflating carbon policy with debates over the appropriate size of the federal budget. The article provides a distributional analysis of the proposal and also makes a number of political, economic, and administrative arguments in favor of a carbon tax and responds to the arguments that have commonly been made against using a tax-based approach to reducing U.S. emissions.