How should governments use the considerable revenue carbon taxes can raise? There are many options for cutting other taxes, increasing spending, or reducing borrowing.
We organize the options into four goals:
- offset the new burdens that a carbon tax places on consumers, producers, communities, and the broader economy;
- support further efforts to reduce greenhouse gas emissions;
- ameliorate the harms of climate disruption; and
- fund unrelated public priorities.
We identify important tradeoffs across the goals and make several recommendations for policy design. Revenue neutrality, for example, can assuage public concerns about expanding government, but spending may be better than tax reductions for achieving some goals.
We recommend that governments use some revenue to reduce other taxes and to soften the blow to lower-income households, coal workers, and their communities, that they be cautious about using revenues to pursue emissions reductions the tax itself encourages, and that they avoid tight earmarks.
Governments should also pay special attention to using revenue in ways that attract and sustain stakeholder and public support for a carbon tax.