WASHINGTON (Aug. 18, 2015) – The option to use carbon fees to comply with the Environmental Protection Agency’s Clean Power Plan could allow some states to offset a significant portion of their tax burdens, according to an R Street Institute policy brief released today.

Authored by R Street Senior Fellow Josiah Neeley, the brief examines EPA data for each of the 50 states to determine the “shadow price” of carbon imputed from emissions-reduction goals called for in the CPP. Neeley then extrapolated from that price and each state’s projected 2030 emissions to determine how much revenue could be generated by using fees, rather than regulatory dictates, to come into compliance.

Texas would generate the most in carbon fee revenues, with $2.5 billion generated per year if the state hits its 2030 reduction limits. That amount is larger than what the state currently collects in taxes on insurance; natural-gas production; cigarettes and tobacco; alcoholic beverages; hotels; or utilities. Carbon-fee collections could be used to offset tax breaks in any number of those areas.

“The revenues that would be generated by carbon fees on an ongoing basis would be sufficient to reduce or eliminate various state taxes in a number of states,” said Neeley. “In Texas alone, insurance and utilities taxes could be phased out entirely, and still leave $45 million to apply toward the state’s $267 million in miscellaneous taxes.”

Neeley cautioned that these estimates do not represent projections about the total cost of the CPP to the wider economy.

“How costly the CPP ultimately proves to be will depend on how each state chooses to go about meeting the required reduction goals,” said Neeley. “The estimates do, however, provide a sense both of how costly meeting the CPP goals via a carbon fee would be, and how much revenue would potentially be available for offsetting tax cuts.”

For a full chart on potential costs and revenues across all states, see the charts in the policy brief.

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