The Financial Times calls the carbon tax the “least worst” tax for its economically efficient ability to raise tax revenue while curtailing an unwanted externality, greenhouse gases. Plain-old blocking-and-tackling economics there. Back in 2011, several AEI scholars illustrated one way a carbon tax might work:
Subsidies for ethanol and other alternative fuels would be abolished (basic research on renewable energy would be funded on the same stringent terms as other basic research). As discussed above, business and household energy tax credits would be abolished. Regulations designed to lower greenhouse gas emissions would be repealed.
Instead, a tax on greenhouse gas emissions (“carbon tax”) would be imposed. The tax would be similar to Revenue Option 35 in the Congressional Budget Office’s March 2011 Budget Options book, but would be implemented as a tax rather than as a cap‐and‐trade program. The tax would take effect in 2013 and be phased in at a uniform pace over five years, so that the 2017 tax equaled the level prescribed for that year in the CBO option, slightly more than $26 per metric ton of CO2equivalent. As prescribed in the CBO option, the tax would thereafter increase at a 5.6 percent annual rate through 2050.
A carbon tax version of CBO Revenue Option 35 would raise roughly $1.2 trillion over a decade with annual revenue gains of over $150 billion a decade out. We can debate what to do with the revenue, but the point is to replace an economically inefficient way of dealing with climate change.