The nonpartisan Congressional Budget Office (CBO) released a report yesterday about the impact of a carbon tax on the U.S. economy and the environment. According to CBO's analysis, the overall economic effect of a carbon tax would depend largely on how revenue from the tax is allocated. For example, using the revenues to reduce the federal budget deficit would offset at least part of the tax's costs to the economy by increasing output in the long run. On the other hand, directing revenue from a carbon tax to the people most impacted by it -- low-income households -- would not benefit the overall economy, resulting in a higher total costs. In 2011, the CBO estimated that a carbon cap-and-trade program could raise $1.2 trillion in revenues over ten years.
The economic costs of a carbon tax basically amount to an increase in the prices of goods and services, especially things like electricity and transportation that require relatively large amounts of carbon dioxide emissions to produce. The higher prices would decrease people's purchasing power, thereby reducing their real (inflation-adjusted) wages. Low-income households would bear a disproportionate share of the costs because they generally spend a larger portion of their income on emission-intensive goods and services.
With respect to the environmental effects of a carbon tax, the CBO concluded (somewhat obviously) that any reduction in U.S. carbon emissions will result in an incremental reduction in expected damages from climate change. As in any other context, the social cost of carbon is highly uncertain.
The CBO report was requested by Rep. Henry Waxman (D-CA).