ABSTRACT
Federal budget deficits in the United States have reached record levels in recent years. During the recession, the federal budget deficit spiked to $1.1 trillion in fiscal year 2012, roughly 30 percent of total government spending or 7 percent of GDP. Although the deficit is now falling (not least because of the sequester), over the longer term the fiscal outlook is set to deteriorate alarmingly (see Chapter 1 ). US policymakers are therefore in the midst of an ongoing debate about how to address these budget challenges and rationalize the federal tax system and one of the options under discussion is a carbon tax. A carbon tax of, say, $25 per ton of carbon dioxide (CO 2 ) could contribute as much as $125 billion per year in additional revenue.
