A carbon tax works by charging companies a set dollar amount for every metric ton of greenhouse gas they release, turning pollution from a free byproduct into a line item on the balance sheet. The tax is typically collected from fuel producers or large industrial emitters, and the revenue is either returned to households, used to cut other taxes, or spent on clean energy programs. More than 30 countries use some version of this approach, with prices ranging from under $1 per ton to over $120. The United States has not enacted a federal carbon tax, though it already runs an emissions reporting program that would form the backbone of one.
Setting the Price Per Ton
Every carbon tax begins with a single number: the dollars charged per metric ton of carbon dioxide, or its equivalent in other greenhouse gases. Set it too low and companies just pay and keep polluting. Set it too high and industries take the hit before cleaner alternatives exist.
The analytical anchor is usually the Social Cost of Carbon, an estimate of the lifetime economic damage caused by one ton of CO₂ released today. The number swings widely depending on the discount rate used to weigh future damages against present costs. Using the DICE-2023 model, the 2020 Social Cost of Carbon ranges from $32 per ton at a 5% discount rate to $176 per ton at 2%.1Proceedings of the National Academy of Sciences. Policies, Projections, and the Social Cost of Carbon: Results From the DICE-2023 Model In 2023, the EPA adopted a central estimate of roughly $190 per ton. That figure anchors federal cost-benefit analyses across regulatory programs even without a carbon tax in place.
Legislators then decide whether to keep the price flat or make it climb. A fixed price gives businesses a stable planning number. An escalating schedule tightens the incentive each year. The Energy Innovation and Carbon Dividend Act, introduced in Congress, would start at $15 per metric ton and increase by $10 annually.2U.S. Senate. Energy Innovation and Carbon Dividend Act The Clean Competition Act proposes a $60 starting price rising 6% above inflation each year.3U.S. House of Representatives. DelBene, Whitehouse Introduce Carbon Border Adjustment to Boost Domestic Manufacturers, Tackle Climate Change Neither has been enacted, but they illustrate the design range.
Who Actually Pays
Where the tax is collected in the supply chain determines who writes the check and how many companies the government has to track. There are two basic approaches.
Upstream Collection
An upstream tax hits fossil fuels at their entry point: coal mines, petroleum refineries, and natural gas processors. These companies pay based on the carbon content of the fuel they produce or import, before any of it reaches an end user. The appeal is administrative simplicity. Research from the University of Chicago found that an upstream tax could capture about 80% of U.S. emissions by taxing fewer than 3,000 companies, and nearly 90% with a modest expansion.4University of Chicago Law School. The Design of a Carbon Tax The cost gets embedded in the price of gasoline, electricity, and heating fuel, so consumers pay indirectly. If the U.S. adopted this model, collection would likely piggyback on the IRS’s existing Form 720, which already handles quarterly excise taxes on fuels like gasoline and diesel.5IRS. Form 720, Quarterly Federal Excise Tax Return
Downstream Collection
A downstream tax targets the facilities that actually burn fuel and release emissions: power plants, cement factories, steel mills, chemical plants. They pay based on what their stacks put into the atmosphere. The advantage is precision, since the tax follows real pollution rather than estimated potential. The disadvantage is scale. The EPA’s Greenhouse Gas Reporting Program already tracks roughly 8,000 facilities, each producing detailed emissions data.6US EPA. Greenhouse Gas Reporting Program (GHGRP) Auditing that many operations costs far more than watching a few thousand fuel producers.
Most real-world carbon taxes use an upstream or hybrid model, collecting from fuel producers while separately covering large industrial emitters whose process emissions are unrelated to fuel combustion, like the CO₂ released when limestone gets heated to make cement.
How Emissions Get Counted
You cannot charge per ton if you cannot count tons. Two methods handle the counting, and large facilities often use both.
Emission Factors
The simpler approach multiplies the amount of fuel a company buys or burns by a standardized conversion rate. The EPA publishes these factors for every major fuel. Burning one barrel of crude oil, for example, produces about 0.43 metric tons of CO₂.7US EPA. Greenhouse Gas Equivalencies Calculator – Calculations and References A company burning 10,000 barrels owes tax on about 4,300 metric tons. This works well for upstream collection because fuel purchases already generate the invoices needed as a paper trail.
Continuous Monitoring
Large facilities may be required to install Continuous Emissions Monitoring Systems, or CEMS, which are sensor arrays in exhaust stacks that measure gas concentrations at least once every 15 minutes.8eCFR. 40 CFR Part 98 – Mandatory Greenhouse Gas Reporting More expensive, but the record reflects what actually left the stack rather than an average.
Converting Other Gases to CO₂ Equivalent
Carbon dioxide is not the only gas that gets taxed. Methane traps far more heat per molecule, and nitrous oxide is worse still. To put everything on the same scale, regulators use Global Warming Potentials that express each gas as a multiple of CO₂ over a 100-year period. Under current EPA rules, one ton of methane counts as 28 tons of CO₂ equivalent, and one ton of nitrous oxide counts as 265 tons.9eCFR. Table A-1 to Subpart A of Part 98 – Global Warming Potentials, 100-Year Time Horizon A dairy operation releasing 1,000 tons of methane would face a bill equivalent to 28,000 tons of CO₂. These multipliers were updated effective January 1, 2025.
Where the Revenue Goes
A carbon tax at $50 per ton applied across the U.S. economy would generate hundreds of billions of dollars a year. What happens to that money is often the most politically contentious part of the design.
Dividends to Households
The most visible approach sends the revenue back to people as equal per-person payments. Canada ran this model federally, issuing quarterly Canada Carbon Rebate payments that varied by province but not by income.10Canada.ca. How Much the Payment Amounts Were In Ontario, the base rebate was about $151 per individual per quarter. The logic: wealthier households consume more energy and pay more carbon tax, while every household gets the same rebate, so the policy is progressive on net. The Energy Innovation and Carbon Dividend Act would follow this model in the U.S., returning all net revenue to households as a monthly dividend.2U.S. Senate. Energy Innovation and Carbon Dividend Act
Tax Swaps
An alternative revenue-neutral design uses carbon tax revenue to cut other taxes, such as payroll or corporate income taxes, dollar for dollar. The idea is to shift the tax base from things you want more of (work, investment) to things you want less of (pollution). Economists sometimes call this the “double dividend” because it both cuts emissions and improves the efficiency of the broader tax code. The challenge is making sure the swap actually reaches the households hardest hit by higher energy costs.
Green Investment Funds
A third option keeps the revenue inside government and directs it to specific programs: public transit, renewable energy research, carbon capture technology, or industrial modernization grants. The Polluters Pay Climate Fund Act, introduced in the 119th Congress, takes this path. Dedicating funds to clean infrastructure can speed the transition, but it also raises the total tax burden on the economy, which is why this model draws more political opposition than dividends or swaps.
Carbon Tax vs. Cap-and-Trade
The two mechanisms get confused often. They share a goal but guarantee different things.
A carbon tax sets the price of pollution and lets the market decide how much emissions fall. Companies know exactly what each ton will cost, which makes long-term investment planning easier. The tradeoff is that the government cannot promise emissions will hit a specific target, since companies might just absorb the cost.
Cap-and-trade runs the other way. The government sets a total emissions cap and issues that many allowances, which companies buy at auction or trade among themselves. The cap guarantees a ceiling on pollution, but the price of allowances fluctuates with market conditions, creating budgeting uncertainty. A tax offers price stability; cap-and-trade offers emissions certainty. Most economists consider them roughly equivalent in theory, though the administrative and political differences matter in practice. Some carbon tax proposals include a ratcheting mechanism that raises the price automatically if emissions do not decline fast enough, borrowing some of cap-and-trade’s certainty advantage.
Border Carbon Adjustments
A common objection is that a carbon tax pushes manufacturing to countries without one, a problem called carbon leakage. If a steel mill in a taxed country faces costs its foreign competitor does not, production migrates and global emissions stay the same. Border carbon adjustments are the proposed fix: charge imports based on their embedded carbon so foreign producers face the same price signal as domestic ones.
The European Union’s Carbon Border Adjustment Mechanism entered its definitive phase on January 1, 2026. EU importers of cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen must buy CBAM certificates reflecting the emissions embedded in those products. The certificate price tracks the EU Emissions Trading System auction price, calculated as a quarterly average in 2026 and shifting to weekly averages from 2027.11Taxation and Customs Union. Carbon Border Adjustment Mechanism Importers who can prove a carbon price was already paid during production abroad can deduct that amount.
In the U.S., the Clean Competition Act would create a similar border adjustment tied to a domestic industrial performance standard, with a charge starting at $60 per ton on importers and domestic manufacturers exceeding the standard.3U.S. House of Representatives. DelBene, Whitehouse Introduce Carbon Border Adjustment to Boost Domestic Manufacturers, Tackle Climate Change The bill would initially cover energy-intensive industries and expand to more complex goods by 2028. The EU system is operational; the U.S. version remains a proposal.
Where the U.S. Stands
The United States is one of the few G20 members without a national carbon price, alongside Russia and Saudi Arabia. Congress has instead used tax credits and subsidies through the Inflation Reduction Act to encourage clean energy. Several carbon pricing bills have been introduced in the 119th Congress, including the Polluters Pay Climate Fund Act and the America’s Clean Future Fund Act, but none has reached a floor vote.
The measurement infrastructure a tax would need already exists. The EPA’s Greenhouse Gas Reporting Program, codified at 40 CFR Part 98, requires annual emissions reports from facilities that emit 25,000 metric tons of CO₂ equivalent or more per year.12Federal Register. Reconsideration of the Greenhouse Gas Reporting Program That threshold effectively exempts most small businesses and farms. Reports are filed electronically and audited, and violations count as Clean Air Act offenses, with the inflation-adjusted maximum civil penalty now reaching $124,426 per day of noncompliance.13Federal Register. Civil Monetary Penalty Inflation Adjustment For comparison abroad, Sweden charges over €118 per ton, Switzerland over €122, and Poland roughly €0.09 per ton. Canada’s federal carbon price reached about C$62 per ton in 2024 before the program’s future became uncertain under shifting political conditions.