The debate over a carbon tax is about two big things: The most obvious is whether a tax at politically acceptable levels could significantly slow climate change. But a second is at least as important: what to do with the hundreds of billions of dollars a carbon tax likely would generate each year.  The tax will never be feasible unless the public supports the way the government uses the revenue.  

Question #2 has been all over the news in recent days, both explicitly and implicitly. And the answer is far from obvious, either politically or economically. Indeed, in many respects it seems more muddled than ever. In just the past week:

• A growing group of high-powered economists has endorsed the idea of a carbon dividend: Rebating carbon tax revenues to all households.
• A new public opinion survey by the Associated Press and the University of Chicago finds that while public support for a carbon tax is relatively high, respondents want government to use the revenue to reduce the use of fossil fuels rather than fund the tax rebate economists prefer.
• The many Democrats who are running for president began fleshing out their policy agendas, and they include costly new federal initiatives ranging from big middle-class tax credits to government-funded health care and college education to a green New Deal—with no way to fully pay for any of them.
• The Congressional Budget Office announced it will release updated fiscal projections next week. They are likely to show the US is facing annual federal deficits exceeding $1 trillion.

Regrettably, a dollar of tax revenue can be used only once. By earmarking a dollar for one purpose, Congress will foreclose its use for the others.

Real money

It might be politically satisfying for Congress to divide the revenue pie into a half-dozen slices—a piece for deficit reduction, another chunk for Medicare for all, and a bit to offset some tax cut. But while money is fungible, spreading dollars around that way would ultimately fall short of significantly financing any one of these priorities.   

And there is real money at stake. My Tax Policy Center colleagues Donald Marron and Elaine Maag estimate that a  $43 per metric ton carbon tax that increases by inflation plus 5 percent annually would raise about $180 billion in new revenue in 2021 and  nearly $300 billion in 2031.

Congress could return the revenue to US households through the carbon dividend, an idea being promoted by a group called the Climate Leadership Council. Last week, nearly four dozen eminent economists, ranging from conservatives such as Martin Feldstein to progressives such as Larry Summers, endorsed both a carbon tax and a rebate.      

Intense pushback

Donald and Elaine estimate that in 2021 a rebate on the $43 per ton tax would be about $600 per adult, or about $1,700 for a family with two adults and two children.

Canada already has adopted a similar carbon tax plus dividend , but as the tax’s effective date nears, it is facing intense pushback from both federal lawmakers and four provincial governments.

But the AP survey may confound conventional wisdom about what do with carbon tax revenue. While many policy experts believe a rebate would soften voter criticism of a big new tax, the poll’s respondents said they’d rather see  government spend the money on reducing carbon emissions or repairing  environmental damage rather than rebate it back. Overall, about 44 percent said they’d support a carbon tax. Two-thirds of them said they wanted the revenue used to “restore forests, wetlands, and other natural features.”

Fifty-nine percent they’d want government to spend the money on renewable energy research. By contrast, only 49 percent said the revenue should be used to provide a tax rebate and 45 percent favored deficit reduction.

Ambitious goals

Democratic presidential hopefuls may have quite different ideas. Some likely would support using the revenue for climate initiatives, Others might like the rebate, which is a modest version  of  universal basic income—another idea getting traction among progressives.  But that would preclude using the tax as a revenue source for their other ambitious ideas. And without a carbon tax, it is hard to imagine where else the money would come from.

For example, Sen. Kamala Harris (D-CA) has proposed a big new tax credit for households making $100,000 or less (very different from a plan to rebate taxes to all households regardless of income). But it would cost nearly $3 trillion over the next decade. While she has suggested rolling back elements of the TCJA to finance such a plan, the entire 2017 law cuts taxes by only about $1.5 trillion. Thus, she’d need to find extra revenue elsewhere.

Similarly, carbon tax revenue could significantly reduce the growing budget deficit. But that idea has relatively little public support, either in the US or elsewhere. See France. And if carbon tax revenue is earmarked for other priorities—whether a rebate, environmental policy, or other initiatives, it would no longer be available for deficit reduction.

If new revenue won’t come from the income tax, and if carbon tax revenue is spoken for, that leaves only a broad-based consumption tax such as a Value Added Tax. But it is hard to imagine Congress enacting both a carbon tax and a VAT anytime in the near future. All this means policymakers must make not one but two difficult choices as they consider a carbon tax: Whether to enact it at all and what to do with the money.