The federal budget deficit has exceeded $1 trillion annually in each fiscal year since 2009, and  deficits are projected to continue. Over time, unsustainable deficits can lead to reduced savings  for investment, higher interest rates, and higher levels of inflation. Restoring fiscal balance would  require spending reductions, revenue increases, or some combination of the two.

Policymakers have considered a number of options for raising additional federal revenues,  including a carbon tax. A carbon tax could apply directly to carbon dioxide (CO2) and other  greenhouse gas (GHG) emissions, or to the inputs (e.g., fossil fuels) that lead to the emissions.  Unlike a tax on the energy content of each fuel (e.g., Btu tax), a carbon tax would vary with a  fuel’s carbon content, as there is a direct correlation between a fuel’s carbon content and its CO2  emissions.

Carbon taxes have been proposed for many years by economists and some Members of Congress,  including in the 112th Congress. If Congress were to establish a carbon tax, policymakers would  face several implementation decisions, including the point and rate of taxation. Although the  point of taxation does not necessarily reveal who bears the cost of the tax, this decision involves  trade-offs, such as comprehensiveness versus administrative complexity.