How Carbon Dioxide Emissions Would Respond to a Tax or Allowance Price: An Update: Working Paper 2021-16

By Ron Gecan.

In this working paper, the Congressional Budget Office describes its recent update of parameters that characterize the relationship between emissions of carbon dioxide and changes in the price of those emissions. Based on a review of recent studies, CBO evaluated how a change in price induced by a tax or an allowance price on emissions would affect the amount of carbon dioxide released by the combustion of fossil fuels in the electric power sector, the transportation sector, and a composite sector that comprises the residential, commercial, and industrial sectors.

In the electric power sector, price sensitivities of energy-related emissions of carbon dioxide over the first 10 years of a potential tax policy are about three times larger, on average—that is, more sensitive—in CBO’s current update than its previous (2010) estimates. In the transportation sector, 10-year average price sensitivities are about 25 percent smaller (that is, less sensitive) in the current update, and they are about the same in the composite sector. Totaled across all three sectors, the projected 10-year reduction in carbon dioxide emissions stemming from a tax on those emissions would be about twice as large as previously estimated, though the increased reductions in the electric power sector would account for nearly all of the additional reductions overall. Because emissions would decline by a larger amount than previously estimated, overall revenues from a prospective tax on energy-related emissions of carbon dioxide would be smaller. Revenues in the electric power sector would be about 25 percent lower over 10 years, but revenues in the transportation and composite sectors would be largely unchanged.