Washington (October 12) – A carbon tax is widely acknowledged as one of the most economically efficient means of reducing greenhouse gas emissions. Aside from such environmental benefits, a carbon tax also provides a source of revenue that can be put to beneficial purposes, such as funding cuts to other, existing taxes. This revenue neutral “tax swap” would greatly reduce or eliminate the economic costs of the tax itself. Despite this, many critics are skeptical as to whether a revenue-neutral carbon tax could be enacted.

In a new policy paper, R Street senior fellow, energy policy director and Southwest region director, Josiah Neeley examines several arguments that suggest that a revenue-neutral carbon tax deal would eventually unravel.

The paper argues that a carbon tax swap is likely to remain stable over the long term and will not lead to bigger government. This is because a carbon tax cannot be exploited as an endless source of new government revenue because higher tax rates would drive quicker emissions reductions. Ultimately, taxes are driven by spending but what we tax can have a big impact on economic growth. A carbon tax swap would boost economic growth in addition to helping the environment.

The author adds, “unlike revenue from income, sales or property taxes, which tends to increase over time even at a constant tax rate, revenue from a carbon tax is likely to remain stable or fall gradually as emissions decline.”