ABSTRACT
Putting a price on carbon dioxide and other greenhouses gases would be the most cost-effective way to reduce future emissions and some of the potential risks of climate change. But pricing carbon has garnered little support from U.S. policymakers to date. At the same time, policymakers feel rising pressure to address America’s inefficient and needlessly complex tax system and our long-term fiscal imbalances, but progress has been limited. One way forward might be to combine these policy challenges into a larger whole, with revenues from a new carbon tax being used to finance some combination of tax reform and deficit reduction. 1
In this chapter, we consider the pros and cons of one potential pairing: combining a carbon tax with reform of the U.S. corporate tax system. Such a pairing would make good sense from the perspective of economic efficiency. By internalizing some of the external costs of carbon emissions, a carbon tax would reduce future carbon emissions and reduce or delay potential harm from climate change. In addition, corporate tax reform could boost the economy, offsetting some or all of the negative impact of new carbon taxes. Dinan and Lim Rogers (2002), for example, found that using carbon revenues to reduce corporate income taxes could offset about 60 percent of the economic cost of limiting carbon emissions, while Rausch and Reilly (2012) find that such a swap could actually increase economic output.
