Two important design choices for a U.S. carbon tax policy are the use of the revenue and whether and how to include measures to address the competitiveness concerns of American businesses. Both of these policy design choices affect the political appeal and overall performance of the policy, and their effects can be interdependent. For example, a carbon tax that funds reductions in corporate income tax rates could make U.S. firms more competitive overall than they otherwise might have been.

In “The role of border carbon adjustments in a U.S. carbon tax,” Warwick McKibbin, Adele Morris, Peter Wilcoxen, and Weifeng Liu examine carbon tax design options in the United States using a model of the global economy. Through four policy scenarios the authors explore two overarching issues: (1) the effects of a carbon tax under alternative assumptions about the use of the resulting revenue, and (2) the effects of a system of import charges on carbon-intensive goods (“border carbon adjustments”).

Consistent with earlier studies, the authors find that the carbon tax raises considerable revenue and reduces CO2 emissions significantly. Gross annual revenue from the carbon tax with lump sum rebating and no BCA begins at $110 billion in 2020 and rises gradually to $170 billion in 2040. By 2040, annual CO2 emissions fall from 5.5 billion metric tons (BMT) under the baseline to 2.4 BMT, a decline of 3.1 BMT, or 57 percent. Cumulative emissions over 2020 to 2040 fall by 48 BMT.

Read the full report on border carbon adjustments at Brookings.