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The Economics and Environmental Science of Combining a Carbon-Based Tax and Tax Relief
Addressing Climate ChangeAddressingClimate Change
Robert Shapiro, Nam Pham and Arun MalikJune 2008
Without Impairing the U.S. Economy:Without Impairing the U.S. Economy:
The U.S. Climate Task Force
 
Table of Contents
Introduction
................................................................
1The Conundrum of Climate Change Scienceand Politics
................................................................
5The Prospects of Global WarmingIf Nothing Is Done
......................................................
8Policies to Reduce Emissions of CO
2
andOther Greenhouse Gases
..........................................
11The Role of Research and Development inControlling Climate Change
......................................
13Designing an Optimal Carbon-Based Tax
................
15The Environmental Impact of the Carbon-Based TaxPackage: Changes in the Energy that AmericansWould Use and the Consequent Emissions
............
17The Financial Impact of the Carbon-Based Tax:The Revenues and What to Do with Them
............
21The Impact of the Carbon-Based Tax Package onEnergy Prices and American Households
..............
24The Impact of the Carbon-Based Tax Package onthe Economy and Incomes of Americans
..............
27Conclusion
..............................................................
30References
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32Appendix
..................................................................
34About the Authors
..................................................
61
 
This study examines a strategy that promises toreduce those emissions to a path that can sustainthe world’s climate, at the least cost to the world’seconomies and with the smallest burdens on theirpeople: Apply a charge or tax to the use of any formof energy based on its carbon content, and recyclethe revenues to provide tax relief for the people andbusinesses using the energy and paying the tax, andfor new supports for climate-related research anddevelopment, and deployment of climate-friendlyfuels and technologies. This tax-shift strategy wouldapply a new charge on carbon that would start at$14 per metric ton of CO
2
in 2010 and increase grad-ually to $50 per metric ton in 2030, and recycle 90percent of the revenues in rebates on payroll taxes toemployees and employers, or their equivalent indirect payments to households. The remaining 10percent of the carbon-tax revenues would be usedto support energy and climate-related research anddevelopment, and new technology deployment.Our analysis employed the National Energy ModelingSystems (NEMS) model to estimate the environmentalresults and economic consequences over the next 20years of applying this strategy, compared to theresults expected under “business-as-usual” condi-tions, currently projected by the Energy Information Agency (EIA) of the U.S. Department of Energy. TheNEMS is the computer-based mathematical model ofthe interactions of U.S. energy markets and the econ-omydeveloped and maintained by the EIA and usedby the agency to conduct periodic short- and long-term forecasts. The NEMS is available for public use,andcan simulate the probable environmental andeconomic results of a range of policy alternatives byaltering certain assumptions within the model.
2
Thisanalysis relies on two NEMS simulations and theirassociated projections for the period 2010 to 2030: (1)a “business-as-usual” scenario using current trendsand conditions as projected by the EIA; and (2) a “tax-shift” scenario based on the policies outlined above.
3
 Addressing Climate Change Without Impairing the U.S. Economy •1
1This is the initial study of the U.S. Climate Task Force, a project of Sonecon, LLC. Lessly Goudarzi and Sharon Showalter at OnLocation, Inc.,conducted the simulations using the NEMS model and provided extensive technical advice. The analysis and conclusions are solely those ofthe authors.2 Office of Integrated Analysis and Forecasting, Energy Demand and Integration Division; Energy Information Administration;http://www.eia.doe.gov/bookshelf/models2002/int.html.3OnLocation, Inc., performed the simulations that produced these projections using the NEMS.
Addressing Climate Change Without Impairing the U.S. Economy:
The Economics and Environmental Science of Combining a Carbon-Based Tax and Tax Relief
1
Introduction
 Among all of the serious threats and risks to the future health and prosperity of the United States and the world,climate change is one that can be addressed and mitigated with resolveand dispatch. Its gravity is not a mat-ter of scientific doubt. Without serious measures to reduce worldwide emissions of carbon dioxide (CO
2
 ) andother greenhouse gases (GHG), their concentrations in the atmosphere over coming decades will reach levelsthat scientists now believe will disrupt weather conditions, agriculture and ecosystems around the world, raisesea levels along coasts where many of the world’s major cities are located, and may increase the frequencyand severity of hurricanes, tornadoes, droughts, floods and monsoons. Scientists also have established thatmost of these emissions come from burning carbon-based fossil fuels to power the economies of every coun-try in the world. Further, public opinion surveys find that majorities in most countries accept these scientific judgments, from the United States and the nations of Europe to China and Latin America, and support seriousaction. Yet little has been done to reduce the risks of climate change, because those steps unavoidably willinvolve major changes in the energy sources and uses that every society depends upon to run its offices andfactories, for virtually every form of transportation, and to heat, cool and operate everyone’s homes.
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