A carbon tax is a government fee charged on greenhouse gas emissions, usually set as a dollar amount per ton of carbon dioxide released. The goal is to make polluting more expensive so businesses and households shift toward cleaner energy, more efficient equipment, or lower consumption. Economists across the political spectrum have long called it the most efficient tool for cutting emissions, but the United States has never enacted one at the federal level, and the policy remains among the most politically contested pieces of climate legislation anywhere in the world.
Countries that have adopted a carbon tax have seen real emissions declines, though the size of the effect depends heavily on how high the tax is set and how the revenue is used. What follows is a plain look at how the tax works, what supporters and critics argue, and what the record shows.
How a Carbon Tax Works
A carbon tax sets a fixed price on each ton of carbon dioxide or equivalent greenhouse gas emitted. Ideally, that price reflects the “social cost of carbon” — the estimated economic damage from one extra ton of emissions, including crop losses, healthcare costs, and property damage from flooding.1World Bank. What Is Carbon Pricing In practice, damage estimates are hard to pin down, so real-world tax rates are usually set based on emissions targets or revenue goals.2MIT Climate Portal. Carbon Pricing
The tax can be collected at different points in the fuel supply chain. The simplest approach is upstream, at coal mines, oil refineries, and natural gas processors. That keeps administrative costs low by targeting fewer than 3,000 collection points while still covering the bulk of emissions.3Tax Foundation. Carbon Tax The tax can also be applied midstream to electric utilities or downstream to households and drivers.4Center for Climate and Energy Solutions. Carbon Tax Basics Wherever it is levied, higher costs ripple through the economy: gasoline, electricity, and manufactured goods all get more expensive, and everyone from power plants to commuters gains a financial reason to switch to lower-carbon alternatives.
Most proposals start the tax at a moderate level and raise it predictably each year. The steady climb gives businesses and households time to adapt and signals that clean-energy investments will pay off over the long run.4Center for Climate and Energy Solutions. Carbon Tax Basics
Carbon Tax Versus Cap-and-Trade
The main alternative is a cap-and-trade system, sometimes called an emissions trading system. Both are market-based, and both rest on the idea that polluters should pay, but they control different variables. A carbon tax sets the price of emissions and lets the market decide how much pollution falls. Cap-and-trade sets a total quantity of allowed emissions by issuing tradeable permits, and the market decides the permit price.5Brookings Institution. Pricing Carbon: A Carbon Tax or Cap-and-Trade
That creates a tradeoff. A carbon tax gives businesses stable, predictable costs, which makes long-term planning easier. But because the government is setting a price rather than a limit, there is no guarantee that emissions hit a particular target. Cap-and-trade guarantees emissions stay below the cap, but permit prices can swing with economic conditions, adding uncertainty for firms.6World Resources Institute. Carbon Tax vs. Cap-and-Trade: What’s Better Policy to Cut Emissions Both raise revenue when permits are auctioned rather than given away, and both push companies toward cleaner technology.
The line between the two approaches has softened over time. Cap-and-trade programs now often include price floors and ceilings that make them behave more like a tax at the extremes, and carbon tax proposals sometimes include automatic rate hikes if emissions targets are missed, borrowing quantity-control logic from a cap. Jean Tirole, the 2014 Nobel laureate in economics, has argued the choice between the two is of “second order importance” compared with the urgency of pricing carbon at all.6World Resources Institute. Carbon Tax vs. Cap-and-Trade: What’s Better Policy to Cut Emissions
The Case For a Carbon Tax
The core economic argument is that carbon pollution is a textbook market failure. Fossil fuel users do not pay for the environmental damage their emissions cause, so they overuse them. A carbon tax folds that external cost into the price, which is why economists call it a “Pigouvian tax,” after the British economist Arthur Pigou.3Tax Foundation. Carbon Tax
Compared with command-and-control regulation, a carbon tax offers flexibility. Instead of dictating which technologies industries must use, it sets a price signal and lets firms find the cheapest path to lower emissions. Supporters argue a well-designed tax could even replace a patchwork of less efficient federal regulations.3Tax Foundation. Carbon Tax
The revenue potential is significant. The Tax Foundation has estimated that a $50-per-ton carbon tax rising 5% annually could produce roughly $1.87 trillion in net federal revenue over a decade.3Tax Foundation. Carbon Tax That money could be returned to households as dividends, used to cut income or payroll taxes, or directed toward deficit reduction. Research suggests that pairing a carbon tax with cuts to distortionary taxes on labor and capital can minimize economic drag and may even produce net economic benefits.4Center for Climate and Energy Solutions. Carbon Tax Basics
The most prominent bipartisan US framework is the Baker-Shultz Carbon Dividends Plan, developed in 2017 by the Climate Leadership Council. Authored by a group that included former Secretaries of State James Baker and George Shultz, former Federal Reserve Chair Janet Yellen, and economist N. Gregory Mankiw, it calls for a rising carbon fee starting at $40 per ton, with 100% of revenue returned as quarterly dividends. The council estimates a family of four would receive about $2,000 in the first year. An accompanying statement endorsing the approach ran in the Wall Street Journal in January 2019 and was signed by more than 3,500 economists, including 28 Nobel laureates.7Climate Leadership Council. Bipartisan Climate Roadmap
The Case Against a Carbon Tax
The most persistent objection is that a carbon tax is regressive. Lower-income households spend a larger share of their income on energy and energy-intensive goods, so they bear a disproportionate share of the cost. Research has found households in the lowest income quintile face a relative burden 1.4 to 4 times higher than those in the highest quintile, and on a per-capita basis the gap can be steeper still.8NBER. How Regressive Is a Price on Carbon
Critics also argue that a carbon tax imposed by one country alone would harm domestic industry without meaningfully slowing global warming. The United States accounts for less than 15% of global emissions, and businesses facing higher costs could relocate production to countries without carbon pricing, a problem known as “carbon leakage.” Border carbon adjustments — tariffs on imports from countries without comparable pricing — can address the problem, but opponents say they are administratively complex and likely to invite trade disputes.9Institute for Energy Research. Carbon Tax Policy Brief
A deeper tension involves the revenue. Using it to send rebates to low-income households protects equity but sacrifices the efficiency gains from cutting other taxes. Cutting corporate or income taxes minimizes economic drag but does little for the households hit hardest by higher energy prices. Most economic models show a carbon tax slows GDP growth unless the revenue funds corporate tax reductions — a choice that undermines the equity case.9Institute for Energy Research. Carbon Tax Policy Brief
Environmental groups have also challenged the idea that a carbon tax would let Washington scrap existing rules. The Natural Resources Defense Council and 350.org have said they view a carbon price as a supplement to direct regulation, not a substitute, meaning the regulatory streamlining supporters promise may never happen.9Institute for Energy Research. Carbon Tax Policy Brief
What Happens to the Revenue
How to spend carbon tax revenue is nearly as contested as whether to have the tax at all. The options fall into two broad camps: returning the money to the public, or investing it in policy priorities.
The “fee-and-dividend” approach, championed by Citizens’ Climate Lobby and the Climate Leadership Council, returns all revenue to households as equal periodic payments. A 2016 analysis found 53% of American households would receive more in dividends than they would pay in higher energy costs, and nearly 90% of households below the poverty line would come out ahead by an average of $311 per year.10Carbon Tax Center. Revenue-Neutral: Yes or No The US Treasury has estimated roughly 70% of households would be better off financially under an equal per-capita dividend.11Resources for the Future. Carbon Pricing 102
The alternative is a “tax swap,” where revenue offsets cuts to income, payroll, or corporate taxes. Modeling suggests this approach minimizes the drag on economic output. One analysis found a carbon tax of $43.40 per ton would reduce real GDP by 0.59% by 2025 without recycling, but only 0.35% if revenues funded tax cuts.11Resources for the Future. Carbon Pricing 102 The tradeoff is fairness: cutting corporate taxes helps investment but does little for lower-income households.
A third option, spending revenue on clean energy, infrastructure, or climate adaptation, polls well with the public. Economists tend to consider it less efficient, and some carbon-tax advocates worry it undermines the political coalition needed to sustain a rising tax.10Carbon Tax Center. Revenue-Neutral: Yes or No
Public willingness to pay is fragile. A 2018 survey by the University of Chicago and AP-NORC found 44% of Americans supported taxing carbon-based fuels regardless of how the revenue would be used, rising to about two-thirds when revenue was tied to environmental restoration. Support drops sharply as the price rises: 57% would accept a $1 monthly fee to combat climate change, but only 23% would pay $40 per month.12AP-NORC Center for Public Affairs Research. Is the Public Willing to Pay to Help Fix Climate Change A 2025 multi-country study in Communications Earth & Environment found that emphasizing environmental effectiveness raised support while making household costs explicit reduced it. Canada’s federal government paired its consumer carbon tax with lump-sum rebates starting in 2019, but subsequent studies found the rebates had limited effect on public support.13Nature. Public Attitudes Toward Carbon Taxes
Does a Carbon Tax Actually Cut Emissions?
A 2024 meta-analysis in Nature Communications reviewed 80 studies across 21 carbon pricing schemes and found that introducing a carbon price reduces emissions by roughly 5% to 10% on average, depending on how publication bias is handled. Seventeen of the 21 schemes studied showed statistically significant reductions. The EU emissions trading system was associated with an estimated 7.3% reduction and British Columbia’s carbon tax with about 5.4%.14Nature. Carbon Pricing Effectiveness Meta-Analysis
The caveats matter. The researchers could find evaluative data for only 20 of the 73 carbon pricing policies in existence as of 2023, so most programs have never been rigorously studied. Nearly half the studies carried a medium or high risk of methodological bias.14Nature. Carbon Pricing Effectiveness Meta-Analysis Price level also matters: research on British Columbia suggests that a tax set too low simply does not have much effect.15Our World in Data. Carbon Price
Sweden
Sweden offers the clearest case of “absolute decoupling,” with emissions falling while the economy grows. Since introducing a carbon tax in 1991 at SEK 250 (€23) per ton and gradually raising it to SEK 1,520 (€138) by 2026, Sweden has cut greenhouse gas emissions by 27% while real GDP per capita rose by more than 50%.16Niskanen Center. What Can We Learn From Sweden’s Carbon Tax17Government of Sweden. Sweden’s Carbon Tax The biggest gains came in district heating, where biomass use rose from 25% in 1990 to nearly 70% by 2012 as fossil fuels became uncompetitive.18World Bank. Sweden: Decoupling GDP Growth From CO2 Emissions Is Possible The Swedish government attributes the tax’s political durability to its stepwise increases.
One caveat: Sweden’s tax covers only about 40% of the country’s greenhouse gases. Major industrial sectors like steel are exempt to protect international competitiveness and instead fall under the EU emissions trading system.16Niskanen Center. What Can We Learn From Sweden’s Carbon Tax
British Columbia
British Columbia introduced North America’s first comprehensive carbon tax in 2008 at C$10 per ton, rising to C$30 by 2012. The tax was revenue-neutral by law, with proceeds funding cuts to personal and corporate income taxes. By 2014 the province had actually cut C$760 million more in taxes than the carbon levy generated, and GDP per capita slightly outperformed the Canadian average over the same period.19World Bank. British Columbia’s Carbon Tax Shift: Environmental and Economic Success
The emissions record is mixed. Fuel consumption covered by the tax fell 16% between 2008 and 2014, and an earlier analysis found per-capita emissions dropped 12.9% compared with 3.7% in the rest of Canada.19World Bank. British Columbia’s Carbon Tax Shift: Environmental and Economic Success A longer-term study through 2018 found total provincial emissions had actually risen nearly 10% from 2008 levels, with transportation up 21% and manufacturing up 27%. The study concluded the tax was simply too low at C$30 per ton to drive reductions in the province’s biggest emitting sectors.20University of Michigan. A Case Study of British Columbia’s Carbon Tax
Australia
Australia is the cautionary tale. The Labor government introduced a carbon tax in July 2012 at A$23 per ton, applying it to the country’s 348 highest-polluting entities. The scheme raised A$3.8 billion in its first six months.21ABC News Australia. Carbon Tax Timeline It also became a political lightning rod. Tony Abbott’s Liberal-National coalition made repeal a central campaign pledge, calling the tax “useless and destructive.” After winning government, Abbott secured the votes of minor-party senators, and on July 17, 2014, the Senate voted 39 to 32 to repeal the tax, just two years after it took effect. The government replaced it with a taxpayer-funded A$2.55 billion scheme paying industries to reduce emissions voluntarily.22BBC News. Australia Carbon Tax Repealed
Where the US Stands
Congress has never passed a federal carbon tax, though proposals have been introduced repeatedly. During the 116th Congress alone (2019–2020), at least nine bills were filed, including the Energy Innovation and Carbon Dividend Act from Representative Ted Deutch, the MARKET CHOICE Act from Representative Brian Fitzpatrick, and the American Opportunity Carbon Fee Act from Senator Sheldon Whitehouse.23Columbia University Center on Global Energy Policy. What You Need to Know About a Federal Carbon Tax in the United States
In the current 119th Congress (2025–2026), five multi-sectoral carbon pricing bills have been introduced, but none has clear momentum. They range from a one-time $1 trillion assessment on fossil fuel companies based on historical emissions (the Polluters Pay Climate Fund Act) to a traditional carbon tax starting at $40 per ton (the MARKET CHOICE Act, the only bill with a Republican cosponsor) to a cap-and-trade system with a $15-per-ton auction floor (the Climate Pollution Standard and Community Investment Act). Congress has moved in the opposite direction as well. A joint resolution nullifying the EPA’s methane Waste Emissions Charge rule was signed in March 2025, and a subsequent law delayed the underlying statutory methane fee until 2034.24Center for Climate and Energy Solutions. Carbon Pricing Proposals in the 119th Congress
In April 2025, President Trump issued Executive Order 14260, directing the Attorney General to identify state and local climate laws — including carbon taxes, cap-and-trade programs, and climate accountability funds — that could be challenged as unconstitutional or preempted by federal law. The order specifically named California’s cap-and-trade system and climate funds enacted by New York and Vermont, describing them as “ideologically motivated” barriers to domestic energy production.25CalMatters. Trump Order Targets California Climate Laws26The White House. Protecting American Energy From State Overreach Legal scholars have questioned whether the order has the force to actually block state laws, though some warn it could chill state-level climate policy.
Carbon Pricing Around the World
As of 2023, more than 50 countries had implemented some form of carbon pricing, covering 44% of global emissions with a positive effective carbon rate, according to the OECD. Emissions trading systems have driven most of the growth, more than doubling their global coverage from 10% to 22% of emissions between 2018 and 2023, while carbon tax coverage held steady at about 5%.27OECD. Effective Carbon Rates 2025
In Europe, 23 countries impose carbon taxes. Sweden’s rate is the highest at €134 per ton (about $145) as of 2025. Switzerland and Liechtenstein follow at roughly €126 per ton and Norway at €124. The European average is about €57 per ton. Poland’s rate is just €0.09 and Ukraine’s €0.68.28Tax Foundation. Carbon Taxes in Europe
On January 1, 2026, the European Union’s Carbon Border Adjustment Mechanism entered its definitive phase. Importers of goods in six carbon-intensive sectors — cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen — must now purchase certificates matching the carbon embedded in their products, priced against EU emissions trading allowances. The mechanism is designed to prevent carbon leakage and create pressure on trading partners to adopt their own pricing.29European Commission. CBAM Successfully Entered Into Force on 1 January 202630European Commission. Carbon Border Adjustment Mechanism It is projected to generate about €7.2 billion annually. China, India, and South Africa have questioned its legality under World Trade Organization rules, and developing countries more broadly have called it unfair given the majority of historical emissions came from wealthy nations.31Brookings Institution. What Is a Carbon Border Adjustment Mechanism
In March 2025, China officially expanded its national emissions trading system, already the world’s largest by volume, from the power sector into cement, steel, and aluminum. The expansion adds roughly 1,500 companies and 3 billion tons of annual CO2 equivalent emissions, bringing total coverage to about 8 billion tons — approximately 60% of China’s emissions and 15% of global emissions. For the initial compliance period, allowances are being distributed for free, with output-based intensity benchmarks phasing in from 2025 and a hard emissions cap targeted for 2027.32ICAP. China Officially Expands National ETS to Cement, Steel, and Aluminum Sectors33IETA. Business Brief: China
Canada’s federal consumer carbon tax, introduced in 2019, was eliminated by Prime Minister Mark Carney’s Liberal government in March 2025. An industrial carbon pricing regime for large emitters remains, with prices set to rise by C$15 per ton annually and reach C$170 per ton by 2030. The Canadian Climate Institute has warned that removing industrial carbon pricing would undermine 20% to 48% of Canada’s projected emissions reductions by 2030 and leave Canadian exporters exposed as the EU and UK apply border carbon adjustments. Major industrial groups, including the Cement Association of Canada and the Canadian Steel Producers Association, have publicly supported keeping the industrial pricing system.34CBC News. Poilievre Industrial Carbon Price
The global pattern is one of expansion in practice but persistent political fragility. Carbon pricing is spreading and, on the whole, cutting emissions, but rate levels, revenue rules, and public tolerance for higher energy costs keep the policy vulnerable to reversal. In the United States, existing federal climate policy is anchored in the Inflation Reduction Act’s tax credits rather than any pricing mechanism, and modeling suggests the IRA alone will fall short of the country’s stated 50–52% emissions reduction target by 2030.35Brookings Institution. Climate Tax Policy Reform Options in 2025 The carbon tax remains, as it has for decades, the policy economists most consistently recommend and politicians most consistently avoid.