Human activities have significantly increased global carbon dioxide emissions and caused long-term shifts in global temperatures and weather patterns. The United Nations reports this may have severe impacts on global health and well-being due to extreme weather events, forced displacement, and food insecurity.

Some advocates point to a carbon tax as a potential solution. A carbon tax puts a price on carbon dioxide emissions, encouraging people, businesses, and governments to reduce emissions and increase the use of renewable energy.

Four choices shape a carbon tax

Policymakers would need to make four central design choices. Each would affect the tax’s environmental, economic, revenue, and distributional effects.

Design choices affect emissions, revenue, and who ultimately bears the cost

The Congressional Budget Office estimates that a carbon tax starting at $25 per ton in 2025, and rising at 2 percent more than inflation, would have raised about $813.6 billion over its first decade. Excluding gasoline narrows the tax base and reduces the amount of revenue raised; that exclusion, with a tax that rises at 5 percent more than inflation would raise up to $700.2 billion. 

Carbon-intensive industries would carry the largest burden under a carbon tax. The Environmental Protection Agency indicates that cars, trucks, ships, trains, and planes, as well as coal and natural gas used in electricity production, are some of the largest contributors of emissions each year.

Some of the burden could be passed on to consumers through higher prices, workers through lower wages, or investors through lower returns. Households with lower incomes spend a larger share of their income on transportation and utilities than those with higher incomes. Thus, a carbon tax would be regressive.

Policymakers could use carbon tax revenue to offset some of its burden. Rebates or refundable tax credits could direct assistance to lower-income households. Other options include reducing taxes, funding climate programs, or reducing the deficit.

Some governments have begun to tax carbon

In 2026, the City of Minneapolis implemented the Pollution Control Annual Registration license, a $5 per-ton tax on carbon emissions. The fee applies to emissions of volatile organic compounds, particulate matter of 2.5 microns or smaller, sulfur oxides, nitrogen oxides, lead, carbon monoxide, and polluting technologies.

Carbon taxes are only one approach to pricing emissions. On the West Coast, California has bolstered a cap-and-trade system since 2012. This mechanism sets an overall limit on emissions while allowing the price of carbon to be determined through the buying and selling of emission allowances. In the 2020s, Washington, Oregon, and Colorado have all implemented cap-and-trade systems with similar goals to reach net zero emissions near 2050.

A carbon tax’s impact depends on its design

A carbon tax’s coverage, collection point, rate, and use of revenue would determine how much it reduced emissions, how much revenue it raised, and who ultimately bore its costs.

This Fiscal Fact is authored by Terrence “Olu” Rouse, the 2026 Peter G. Peterson Foundation Fiscal Intern in the Urban-Brookings Tax Policy Center.