The Economic, Fiscal, and Emissions Impacts of a Revenue-Neutral Carbon Tax

Since the Tax Cuts and Jobs Act (“TCJA”), President Trump and members of Congress have called for a “Phase 2” of the legislation to permanently extend individual tax cuts. Given this possibility, the Alliance for Market Solutions engaged FTI Consulting to examine how a revenue-neutral carbon tax could fund Phase 2 of tax reform. In addition to extending TCJA individual tax cuts, FTI Consulting modeled the extension of certain expiring federal tax provisions and the delay of new taxes under the Patient Protection and Affordable Care Act.

In its report, FTI Consulting considered how a revenue-neutral carbon tax of $20 per metric ton (increasing by five percent annually) paired with Phase 2 tax reform would impact the federal budget, U.S. and state economies, carbon dioxide emissions, and major industries from 2019 to 2028.

During the 10-year study period, FTI Consulting found the revenue-neutral carbon tax would:

Have either a negligible or slightly positive impact on GDP and employment in 47 states;
Reduce emissions by 13 percent overall and 28 percent in the power sector;
Result in the retirement of 56 gigawatts of coal plants, fuel oil plants, and older gas plants; and,
Bring 94 gigawatts of solar and wind resources, and 55 gigawatts of new gas plants online.

Overall, FTI Consulting found the revenue-neutral carbon tax would have a nearly neutral impact on both the federal budget and the U.S. economy over the 10-year study period.