Recent years have seen increasing use of carbon pricing instruments as a means of mitigating carbon emissions. For example, Stavins (2019) notes that 26 carbon taxes and 25 cap-and-trade policies have either been implemented or are scheduled for implementation worldwide.

In the United States, these include cap-and-trade programs in the states of California and Washington as well as the Regional Greenhouse Gas Initiative (RGGI), a multi-state cap-and-trade system that includes Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont. However, the United States does not have a national carbon pricing mechanism (in particular, one was not included in the Tax Cuts and Jobs Act (TCJA) enacted in 2017), and the prospects for national carbon pricing policies in the immediate future are dim.

Nevertheless, many recent tax policy debates in the United States have included discussions of implementing carbon pricing on a national level. In this paper, we focus on a carbon tax, that is, a tax on fossil fuels proportional to their carbon content as a proxy for the emissions of carbon dioxide that will occur upon combustion. Such taxes are typically coupled with measures that would “recycle” the resulting revenues, for example, as payroll, personal income, or corporate income tax reductions or as per-household or per-capita lump-sum rebates. These alternative revenue-recycling options would have very different effects on economic efficiency and the distribution of income, and the equity-efficiency trade-offs associated with various alternative carbon tax revenue-recycling mechanisms are the focus of this analysis.