Option 80:

Introduce a Carbon Tax at $25 per Ton

Topline Estimates

Gross Domestic Product (GDP)
-0.2%
Gross National Product (GNP)
-0.1%
Full-Time Equivalent Jobs
-194K
Wage Rate
0.0%
Capital Stock
-0.2%
Conventional Primary Deficit Change (10‑Yr)
-$1,099.6B
Dynamic Primary Deficit Change (10‑Yr)
-$910.5B
Dynamic Total Deficit Change (10‑Yr)
-$1,108.7B

Source: Tax Foundation General Equilibrium Model.

Among economists, a tax on greenhouse gas emissions like CO2 is viewed as an ideal policy solution to address climate change, although identifying the optimal rate is subject to uncertainty.

This option imposes a tax on US greenhouse gas emissions (carbon dioxide, methane, nitrous oxide, and fluorinated gases), including both energy-related and non-energy-related emissions. The tax is border-adjusted, so it exempts emissions from producing exports, while including emissions from purchasing imports.

The tax rate starts at $25 per ton of CO2 equivalent greenhouse gas emissions and rises by inflation plus 1 percent per year. We assume high noncompliance rates for areas where emissions may be difficult to measure, such as methane emissions from agriculture. Like other excise taxes, a carbon tax would primarily burden labor, reducing real, after-tax wages, hours worked, and economic output. These estimates only capture the effect of a carbon tax reducing after-tax returns to labor and do not account for environmental or other benefits, nor compliance or other costs.

On a conventional basis, this option would decrease the primary deficit by $1,099.6 billion over the budget window. Long-run GDP would fall by 0.2 percent, while long-run GNP would fall by 0.1 percent. On a dynamic basis, the primary deficit would decrease by $910.5 billion from 2027 through 2036, $189.1 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 172.8 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.5 percent. The top quintile of taxpayers and the bottom quintile of taxpayers would each experience a 0.5 percent decrease. On a long-run dynamic basis, taxpayers would see a 0.6 percent decrease on average.

Modeled Results

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About the Authors

Erica York Tax Foundation
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Erica York

Vice President of Federal Tax Policy

Erica York is Vice President of Federal Tax Policy with Tax Foundation’s Center for Federal Tax Policy. Her analysis has been featured in The Wall Street Journal, The Washington Post, Politico, and other national and international media outlets.

Garrett Watson Tax Foundation
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Garrett Watson

Director of Policy Analysis

Garrett Watson is Director of Policy Analysis at the Tax Foundation, where he conducts research on federal and state tax policy. His work has been featured in The Washington Post, The Atlantic, Politico, the Associated Press and other major outlets.

Huaqun Li Tax Foundation
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Huaqun Li

Senior Economist, Director of Modeling Projects

Dr. Huaqun Li is Senior Economist, Director of Modeling Projects at the Tax Foundation. She focuses on developing and maintaining the Foundation’s Taxes and Growth Model, which models the budgetary and economic effects of changes to federal tax policy.

William McBride or Will McBride Tax Foundation
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William McBride

Chief Economist & Stephen J. Entin Fellow in Economics

Dr. William McBride is the Chief Economist & Stephen J. Entin Fellow in Economics at the Tax Foundation, where he oversees major research projects primarily related to reforming the federal tax code, advancing sound tax policy, and improving the federal government’s fiscal outlook.

Alex Durante Tax Foundation
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Alex Durante

Senior Economist

Alex Durante is a Senior Economist at the Tax Foundation, working on federal tax policy and model development. Alex worked as a research assistant at the Federal Reserve Board and served as a staff economist on the Council of Economic Advisers.

Alex Muresianu Tax Foundation
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Alex Muresianu

Senior Policy Analyst

Alex Muresianu is a Senior Policy Analyst at the Tax Foundation, focused on federal tax policy. Previously working on the federal team as an intern in the summer of 2018 and as a research assistant in summer 2020. He attended Tufts University, graduating with a degree in economics and minors in finance and political science.

Peter Van Ness Tax Foundation

Peter Van Ness

Research Software Developer

Peter Van Ness is a Research Software Developer at the Tax Foundation working on federal tax policy and model development. Peter previously worked as a research assistant at another think tank and as a data analyst at a consulting firm.

Aleksei Shilov Tax Foundation Research Software Developer

Aleksei Shilov

Research Software Developer

Aleksei Shilov is a Research Software developer at the Tax Foundation working on economic model development and federal tax policy. Aleksei joined the Tax Foundation as an intern in January 2025. He holds a B.S. in computer science and a minor in economics from Northeastern University and is currently based in Boston, MA.

Daniel Bunn Tax Foundation President & CEO
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Daniel Bunn

President and CEO

Daniel Bunn is President and CEO of the Tax Foundation. Daniel has been with the organization since 2018 and, prior to becoming President, successfully built its Center for Global Tax Policy, expanding the Tax Foundation’s reach and impact around the world. Prior to joining the Tax Foundation, Daniel worked in the United States Senate at the Joint Economic Committee.