POTENTIAL STATE-LEVEL CARBON REVENUE UNDER THE CLEAN POWER PLAN

In 2015, the U.S. Environmental Protection Agency issued the Clean Power Plan under which each state can set a mass-based target to meet its assigned electric power sector carbon dioxide emission reductions. If it proceeds, states can design policies to meet those requirements and also raise revenue via a carbon tax or cap-and-trade program with auctioned permits. We calculate each state's potential revenue and demonstrate its significance. In 13 states, carbon revenue could replace all of corporate tax revenue. In addition, we collect budget projections from six key states to determine if and how carbon revenue can substantially reduce deficits. While such revenue is not free money, we discuss its advantages over use of distortionary taxation. Finally, we consider distributional aspects and potential external fiscal effects on federal revenue. (JEL H2, H3, H7, Q5)