A carbon tax would provide an incentive to reduce the use of fossil fuels, fostering the growth of clean energy. But it would have another benefit as well: providing revenue to help cut the deficit. Much the same effect could be produced by auctioning allowances within a cap-and-trade system.According to Resources for the Future, a carbon tax of $10 per ton of CO2 could generate annual tax revenues of $60 billion, and a carbon tax of about $25 could raise roughly $125 billion per year. The amounts are uncertain in part because the tax revenue is sensitive to the price of natural gas — low natural gas prices drive out coal and reduce revenue from the carbon tax. Regardless, the potential for deficit reduction is significant.
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