Reduction of fossil fuel emissions in the USA: A holistic approach towards policy formulation

In the United States, the response of the federal government to the global initiative of reduction of emissions of CO2 has been limited. With the Kyoto Protocol having entered into force in February 2005, there will be renewed international pressure on the United States for action. Concurrently, the US economy, growing modestly, is characterized by large current account and budget deficits. This situation calls for garnering additional revenue through repealing of the recent tax cuts. An option available is to impose a modest carbon tax. The rationale of such a tax is that it would address the twin objectives of additional revenue and reduction of emissions. In this paper, the impact of a hypothetical carbon tax imposed in a revenue-neutral context on 2001 household incomes is analyzed primarily to ascertain its progressivity. Progressivity of any tax is strongly associated with its political acceptability. The incidence of the hypothetical carbon tax is computed across the income quintiles. It is observed that only the households in the highest income quintile and the lowest income quintile are impacted by the tax. It is found that this tax is weakly regressive in the US context.