Climate Change

Summary

We support:

• Using the bulk of the remaining revenue to help finance Social Security and reduce federal borrowingIf you have already made up your mind, scroll to the bottom of the page and take the poll. If you would like to hear more, please read on.

• Imposing a $100-per-metric-ton carbon tax on U.S. greenhouse-gas emissions

• Applying comparable carbon tariffs to imports from countries without similar policies

• Using a portion of the revenue to support direct atmospheric carbon capture, basic research in alternative energy, and potentially useful geo-engineering

• Using the bulk of the remaining revenue to help finance Social Security and reduce federal borrowing

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Background

The Proposal

Climate change is a global problem. Any effective response will ultimately require international cooperation. We believe a market-based approach can produce substantial reductions in greenhouse-gas emissions at a manageable economic cost.

The United States should impose a carbon tax of $100 per metric ton of carbon dioxide emissions, with comparable taxes on other greenhouse gases, and encourage other countries to adopt comparable policies.

A carbon tax is different from most taxes because it improves rather than distorts an important market signal. Greenhouse-gas emissions impose costs that are not fully reflected in the market prices of fossil fuels. Putting a price on those emissions allows consumers and producers to take those costs into account while remaining free to decide how best to respond.

The tax would not require the government to choose the technologies that will ultimately reduce emissions. Solar, wind, nuclear power, geothermal energy, efficiency improvements, electric vehicles, carbon capture, natural gas in place of coal, and technologies that have not yet been developed would all compete on a more level playing field.

The tax could be collected primarily upstream, at points such as the wellhead, mine mouth and import terminal, rather than from millions of individual consumers.

Where carbon that has already been taxed is subsequently captured and permanently stored, the facility should receive a carbon-tax credit equal to the tax attributable to the captured carbon. This is not an additional subsidy for carbon capture and storage. It simply ensures that the tax ultimately applies only to carbon released into the atmosphere.

Direct removal of carbon dioxide already in the atmosphere is different and could appropriately receive separate government support.

What a $100 Carbon Tax Would Mean

A serious carbon-tax proposal should say plainly that energy prices would rise. Changing relative prices is how the policy reduces emissions.

Gasoline

Burning a gallon of gasoline produces about 8.9 kilograms of carbon dioxide. A $100-per-ton carbon tax would therefore mechanically add about 89 cents per gallon—roughly $1 per gallon—if fully reflected in the retail price. EPA

That calculation probably overstates the actual long-run increase consumers would experience. A carbon tax would reduce demand for oil and other fossil fuels, putting some downward pressure on pre-tax prices. That effect would be limited if the United States acted alone, especially for globally traded fuels, but significantly larger if comparable carbon taxes were adopted by most major economies.

The economic burden would therefore be shared between consumers, who would pay higher after-tax prices, and fossil-fuel producers and owners of fossil-fuel resources, who would receive lower prices or returns. The precise division would depend on supply-and-demand conditions.

Higher gasoline prices would also encourage consumers to purchase more fuel-efficient vehicles, hybrids and electric vehicles. Electric vehicles and plug-in hybrids would largely avoid the gasoline expense, although electricity costs would rise to varying degrees depending on how the electricity is generated.

Residential Electricity

At the current U.S. generating mix, a $100 carbon tax, if fully passed through with no change in generation or consumption, would initially raise the average total residential electricity bill by roughly 20 percent. EIA

The effect would vary enormously. Low-carbon systems relying heavily on nuclear, hydro, wind or solar could experience increases of around 10 percent or less, while heavily coal-dependent systems could initially see increases of 50 percent or more.

Those are not forecasts of permanent electricity prices. Utilities would change dispatch, retire high-emitting plants, install carbon capture where economical, and invest in lower-carbon generation.

Residential Natural Gas

Burning natural gas releases about 52.9 kilograms of CO₂ per million Btu. A $100 tax therefore adds approximately 53 cents per therm, or about $5.50 per thousand cubic feet.

At unchanged consumption, that would initially raise the average total residential natural-gas bill by roughly 35–40 percent, with substantial variation among states. EIA

Over time households could respond through better insulation, more efficient equipment or conversion to electric heat pumps where the economics justify it.

Use of the Revenue

At current emission levels, the potential revenue is substantial.

According to the U.S. Energy Information Administration, U.S. energy-related carbon dioxide emissions totaled about 4.9 billion metric tons in 2025. A purely mechanical calculation—$100 multiplied by those emissions—produces about $490 billion per year.

That is not a revenue forecast. The tax would begin reducing the emissions on which it is levied, which is its purpose. It would also interact with the rest of the federal tax system. The Congressional Budget Office, in estimating revenue from carbon taxes, takes into account both reductions in emissions and reductions in other federal tax receipts resulting from the tax.

The important point is the scale: a $100 carbon tax could initially produce several hundred billion dollars annually.

To put that number in perspective, the Congressional Budget Office reports that the entire federal corporate income tax raised $452 billion in fiscal year 2025. The potential revenue from a $100 carbon tax is therefore of roughly the same magnitude as one of the federal government’s major existing taxes.

Unlike most taxes, however, the carbon tax would raise revenue while improving an important market signal by requiring the price of fossil fuels to reflect more of the costs associated with their use.

The revenue should decline substantially over time if the policy succeeds. This is an important feature of the proposal rather than a defect. The carbon tax should not become the permanent financial foundation for new federal spending that depends on continued carbon emissions.

A portion of the revenues should be used for:

• Subsidizing direct atmospheric carbon capture and permanent sequestration
• Supporting basic research in alternative energy technologies and geo-engineering

Carbon capture at power plants should generally be handled through the carbon-tax credit for captured and permanently stored emissions, rather than through a separate technology subsidy. Direct atmospheric capture is different because it removes carbon that is already in the atmosphere and therefore has no previously paid carbon tax to rebate.

We would use the bulk of the remaining revenue to help finance Social Security.

Social Security already faces a substantial financing problem. According to the 2026 Social Security Trustees Report, the Old-Age and Survivors Insurance Trust Fund is projected to exhaust its reserves in the fourth quarter of 2032. If the Old-Age and Disability funds are considered together, their combined reserves are projected to be exhausted in 2034.

The retirement of the unusually large baby-boom generation contributes to the near-term pressure, and that particular demographic bulge will eventually pass. But Social Security’s financing problem is not merely temporary. Lower birth rates, increasing longevity and other demographic changes leave a continuing long-term imbalance between scheduled benefits and dedicated revenues.

Carbon-tax revenue could therefore provide valuable transitional financing rather than a permanent solution. It could reduce the amount of immediate adjustment that would otherwise have to come from higher payroll taxes, lower benefits or additional federal borrowing, allowing necessary changes to be phased in more gradually.

Putting the money into Social Security does not create additional federal resources: money is fungible. The fiscal benefit comes from using a large new revenue source to reduce the amount the federal government must obtain elsewhere or borrow.

There is nevertheless a useful match between the two policies. Carbon-tax revenue should be largest during the early years of the transition to a lower-carbon economy and should subsequently decline as emissions fall. That makes it particularly suitable as bridge financing while permanent Social Security reforms are phased in.

Put another way, carbon-tax revenue could reduce or delay the need for future increases in payroll taxes.

Some people suggest returning carbon-tax revenues to the public through equal per-capita payments. Such rebates have considerable political appeal and could offset some of the distributional impact of the tax. Given the seriousness of the federal government’s fiscal and Social Security problems, however, we do not favor using most of this new revenue for rebates.

Effectiveness

Dealing with climate change is possible. A number of economic analyses conclude that carbon pricing can produce substantial reductions in greenhouse-gas emissions while allowing reductions to occur where they are least expensive.

A Resources for the Future study estimated that an economy-wide carbon tax of less than $22 per ton, if implemented in 2017, could have allowed the United States to meet its Paris commitment to reduce greenhouse-gas emissions 28 percent below 2005 levels by 2025.

That was a model estimate for a particular target, starting date and set of economic assumptions; it should not be interpreted as an estimate of the carbon price needed today.

More recent work points toward substantially higher carbon prices for ambitious global reductions. A 2024 International Monetary Fund Staff Climate Note estimated that a global carbon price of about $85 per ton by 2030 would put emissions on a trajectory consistent with limiting warming to 2°C. Substantially more would be required for a 1.5°C trajectory.

These estimates do not establish that $100 per ton is precisely the right tax. They do suggest that a carbon price of that general magnitude is well within the range considered seriously by economists and international institutions attempting to achieve substantial reductions in greenhouse-gas emissions.

The important qualification is that climate change is inherently global. Reducing U.S. emissions while emissions continue growing elsewhere cannot solve the problem.

Addressing the Global Character of the Problem

To encourage other countries to impose comparable carbon taxes, the U.S. should place tariffs on goods imported from countries that do not impose comparable greenhouse-gas taxes themselves. The tariff should be proportional to the estimated greenhouse-gas emissions associated with producing the imported goods.

If a significant group of major trading nations adopts this approach, countries exporting carbon-intensive goods would have a straightforward choice: allow importing countries to collect the carbon charge at the border, or impose an equivalent carbon tax themselves and keep the revenue.

Most governments should prefer to collect the money themselves.

The objective of the carbon tariff is therefore not primarily to raise U.S. revenue. Its purpose is to provide an incentive for other countries to adopt comparable carbon prices and to prevent domestic producers from being placed at a competitive disadvantage by the U.S. tax.

Indeed, if the border adjustment works perfectly, the revenue it produces should eventually approach zero as other countries adopt comparable carbon-pricing systems.

Each nation could use the revenues from its own carbon tax for its own purposes.

Political Resistance

There is resistance to carbon taxes across the political spectrum, for a variety of reasons, including:

• Skepticism that climate change is serious, or even real
• Antipathy toward all tax proposals
• Concern that lower-income groups would bear too large a burden
• Preference for targeted subsidies financed primarily by taxes imposed on higher-income taxpayers

There is broad scientific agreement that human-generated greenhouse-gas emissions are warming the climate and create significant risks. The legitimate policy debate is over the magnitude and timing of those risks and the most effective response to them.

No one likes taxes. Most taxes discourage activities that would otherwise be economically useful. A carbon tax is unusual because its central purpose is to correct a market signal by incorporating a cost that is currently imposed on others.

The question should therefore not simply be whether a carbon tax increases the price of fossil fuels. That is its purpose.

The question is whether pricing carbon produces emission reductions at lower economic cost than regulations, mandates, prohibitions and subsidies targeted toward particular technologies.

A large body of economic research concludes that broadly pricing greenhouse-gas emissions can generally achieve a given reduction in emissions at lower overall economic cost than technology-specific mandates because it allows millions of consumers and businesses to identify the least expensive opportunities to reduce emissions. The Congressional Budget Office, for example, has concluded that under conditions similar to the climate problem, market-based carbon pricing can reduce emissions more efficiently by giving households and businesses greater flexibility over when and how reductions occur.

The intuition is straightforward. Suppose one company can eliminate a ton of carbon dioxide for $20, while another would have to spend $200 to eliminate the same ton. With a carbon price between those two amounts, the first company reduces its emissions because doing so costs less than paying the tax. The second initially pays the tax and waits until cheaper technology becomes available. Emissions reductions therefore occur first where they cost the least.

We believe that is generally preferable to requiring every company or consumer to make the same reduction regardless of cost.

Distribution of the Cost Across Income Groups

A carbon tax raises legitimate distributional concerns because energy expenditures represent a significant share of household budgets, particularly for lower-income households.

We do not believe, however, that every individual tax must be progressive. Progressivity should be judged across the tax and transfer system as a whole. The purpose of a carbon tax is to make the price of carbon-intensive activities reflect more of the costs they impose on others.

If climate change is as serious a problem as many of its advocates contend, it is difficult to argue simultaneously that consumers generally should not face the economic cost of reducing emissions and that the problem should instead be addressed primarily by taxing other people to subsidize selected technologies.

The more sensible approach is to price the environmental harm directly, allow consumers and producers to respond to that price, and address legitimate concerns about income distribution through the broader tax and transfer system.

The distribution of the burden is also considerably more complicated than simply looking at who pays higher prices at the gasoline pump or on a utility bill. The Congressional Budget Office has noted that estimates of the distributional burden of carbon pricing depend substantially on how incidence is measured and on interactions with the existing tax and transfer system.

A vehicle that consumes large amounts of gasoline becomes less valuable when the expected future price of gasoline rises. The person who owns that vehicle when the policy is imposed therefore bears part of the cost through a reduction in its resale value. A subsequent purchaser pays more for gasoline but also pays less for the vehicle.

The same principle applies to other carbon-intensive capital. A coal-fired power plant becomes less valuable when its expected future operating costs include a substantial carbon tax. Fossil-fuel reserves also become less valuable as expected demand and the pre-tax prices received by producers decline.

Thus, some of the burden of a carbon tax falls on people who own carbon-intensive capital and fossil-fuel resources when the policy is imposed rather than simply on consumers according to their current energy expenditures.

Natural-gas assets are less uniformly exposed because gas is both taxed and a lower-carbon substitute for coal.

Over time, as old capital is retired and new investment can move toward other technologies, these transitional effects should diminish.

Targeted subsidies financed through the general tax system may appear more attractive because much of their explicit tax burden falls on higher earners. But directing subsidies toward particular technologies is generally a less efficient way to reduce emissions. Achieving the same reduction in greenhouse gases would therefore impose a larger total economic cost.

Carbon Tax vs. Cap and Trade

We favor a carbon tax over a cap-and-trade system for several reasons, including ease of administration, applicability across a wide range of sectors, transparency and the ability to raise substantial revenue.

A tax establishes the price of emissions and lets the quantity adjust. Cap and trade establishes the quantity of permitted emissions and allows the price to adjust.

The Congressional Budget Office has concluded that both approaches use market incentives but that, under circumstances resembling the climate problem, a tax generally has efficiency advantages because it provides greater flexibility over when emissions reductions occur.

More broadly, market-oriented approaches allow households and businesses to seek the least expensive ways of reducing emissions rather than requiring government regulators to select the technologies or behaviors that must change.

Existing Power Plants: Pay, Capture, or Retire

Coal would face the largest immediate adjustment.

The average U.S. coal-fired power plant emits about 2.31 pounds of carbon dioxide per kilowatt-hour, equivalent to roughly 1.05 metric tons per megawatt-hour. A $100 carbon tax would therefore add about $105/MWh to the cost of coal generation without carbon capture.

Efficient natural-gas combined-cycle plants emit much less, so the tax would add roughly $33–34/MWh. EIA

Existing plants face a choice different from that facing an investor considering a new plant because their original construction costs have already been incurred.

Their owners therefore have several options:

• Pay the carbon tax
• Install carbon capture and receive a credit for carbon permanently stored
• Operate less often
• Retire the plant

For representative natural-gas combined-cycle retrofits, National Energy Technology Laboratory estimates suggest that carbon capture, transportation and permanent storage can in some cases cost less than $100 for each ton of emissions avoided. If an owner can spend less than $100 to capture and permanently store a ton of carbon and thereby receive a $100 carbon-tax credit, installing carbon capture can simply be good business. NETL

Coal-plant economics vary more widely. Some large plants may be capable of installing CCS economically at a $100 carbon price; others will not. Efficiency, age, remaining useful life, construction difficulty and access to CO₂ transportation and permanent underground storage all matter. NETL

The important point is that a carbon tax does not order coal plants to close. Government sets the price of the environmental harm. Plant owners decide how best to respond.

The Long Run: An “All of the Above” Strategy

Over the longer run, coal-fired electricity would probably continue to decline even without climate policy.

In an EIA scenario that permits both technologies to be built, a modern, efficient new coal-fired plant has an estimated levelized cost of about $93/MWh, compared with about $56/MWh for new natural-gas combined-cycle generation, in 2025 dollars. EIA

A carbon tax does not reverse that underlying advantage. Both technologies can recover the tax attributable to captured carbon by adding CCS, but gas begins with lower capital costs, greater efficiency and much less carbon to capture.

If natural-gas prices remain in roughly their current real range, new natural-gas plants with carbon capture are likely to remain more economical than new coal plants with carbon capture.

Over several decades, existing coal plants might survive where retrofit economics are favorable, while replacement investment increasingly moves toward gas with CCS, nuclear power, solar, wind, hydro, storage, geothermal or technologies not yet commercially available.

That is what we mean by an all-of-the-above energy policy. It does not mean guaranteeing coal, natural gas, nuclear power, solar or any other technology a particular market share. It means pricing the environmental harm and allowing all of them to compete.

Government policy may be necessary to remove regulatory impediments to the growth of nuclear power, but the government need not subsidize nuclear generation simply because it favors the technology. A carbon tax automatically makes nuclear power more competitive by increasing the cost of carbon-emitting alternatives.

Coal mining is difficult and dangerous work. John L. Lewis, the legendary president of the United Mine Workers, supported mechanization even though it eliminated mining jobs. He argued that it was “better to have a half a million men working in the industry at good wages and high standards of living” than to maximize employment by preserving less productive mining methods. The Atlantic

Preserving the maximum possible number of mining jobs should not itself be an economic objective. The legitimate concern is helping workers and communities adjust to change.

Coal should have the opportunity to compete, but if technological progress eventually means that fewer people need to mine it, that is not a failure of energy policy.

Other Policies That Don’t Require International Cooperation

Taxes on coal, oil and natural gas imposed for conventional environmental reasons, as described in the Environmental Policy section, would also shift U.S. energy demand toward less carbon-intensive technologies.

The movement toward real-time pricing of electric power, described in the Energy Policy section, would also provide an economically efficient, market-based incentive for technologies such as solar power and energy storage.

The Developing World

Countries such as China and India that are deeply integrated into world trade would have strong incentives to impose comparable carbon taxes if their exports would otherwise face carbon tariffs in major markets.

Other developing countries that are less dependent on exports may have weaker incentives and may prefer to continue taking advantage of inexpensive fossil fuels.

Rather than relying primarily on large direct financial transfers, developed countries could subsidize basic research and technology transfer that reduce the cost of moving toward less carbon-intensive economies.

If direct atmospheric carbon capture eventually becomes inexpensive enough, it may also provide a means of offsetting emissions from countries that remain unwilling or unable to participate fully in a global carbon-pricing system.

Geo-Engineering and Other R&D

The downside of many forms of geo-engineering is that they would involve large-scale experiments with the environment. The potential upside is that some technologies might allow the United States, acting alone or with a relatively small number of cooperating countries, to reduce climate risks or buy additional time.

Direct carbon capture and sequestration from the atmosphere is especially attractive conceptually because it does not require intentionally altering other aspects of the climate system. The obstacle is cost. It remains too expensive for deployment at the enormous scale that would be required.

The Department of Energy’s Carbon Negative Shot, for example, established a goal of developing carbon-removal technologies capable of removing and durably storing carbon dioxide at billion-ton scale for less than $100 per net metric ton. That is a technology goal, not a description of today’s cost.

We support government investment in basic research on direct atmospheric carbon capture, other potentially useful geo-engineering approaches, and low-carbon energy technologies.

Conclusion

The general principle throughout this proposal is simple:

Price the environmental harm, allow markets to search for the least-cost response, encourage the rest of the world to do the same, and use government research dollars where private markets are least able to capture the benefits.

A $100 carbon tax would not painlessly solve climate change. Consumers would pay more for carbon-intensive energy. Some existing assets would lose value. Coal use would probably decline substantially. Other technologies would gain.

Those changes are not unintended consequences. They are the means by which the policy works.

The advantage of a carbon tax is that government need not know in advance which technologies, companies or individual decisions will ultimately produce the transition. It establishes a price for the environmental harm and lets people decide how best to avoid it.

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