The goals of a tax on carbon are to:

1. Encourage a reduction in energy use and resulting carbon and pollution emissions;
2. Encourage use of fuels that are less carbon intensive and less polluting; and
3. Generate revenue to allow for corresponding cuts in taxes on beneficial activities.

A carbon tax can thus be a component in an Environmental Tax Shifting (ETS) proposal to increase taxes on activities harmful to the environment, and reduce traditional taxes on activities with economic or social benefits.

Energy generated from fossil fuels is associated with several environmental ills — air pollution from fuel combustion, ecosystem damage from mining, refining, and transporting fossil fuels, and the potential catastrophic consequences of global climate change from carbon dioxide (CO₂) emissions.

While energy use is essential to our current way of life, there is great potential to reduce the energy intensity of our economic activities and lifestyle, to increase efficiency, and to develop more benign energy sources. Potential energy savings and cleaner energy sources are becoming available with technological advances and are responsive to public policies and economic circumstances.

There are several reasons why a tax on carbon is a reasonable approach to taxing energy use. Carbon taxes on fossil fuels are a reasonable proxy for other energy-related air pollutants. Coal, for example, would be most affected by a carbon tax, relative to other fuels. Not only does it contain the highest amount of carbon per unit of energy, but it is also the "dirtiest" fossil fuel, giving rise to particulates, toxic heavy metals, nitrogen oxides (NOx), and sulfur dioxide (SO₂) emissions. As it is the cheapest of the fossil fuels per unit of energy, it would experience the highest relative price increase from a carbon tax. In addition, while carbon dioxide in not the only greenhouse gas contributing to global warming, it is the major contributor.

A carbon tax should be sizable enough to be felt by energy users and affect their consumption, fuel choice, and technology decisions. At the same time, it should not impose an undue burden for the average household and business. Energy expenditures are less than 5 percent of most household budgets, and even in most business budgets, so a tax that raises the prices of fossil fuels by a few percent would be the minimum. A tax level of $10 per ton of CO₂ generated falls within this range.

As shown below (left), a per ton tax levied on CO₂ generation would affect various fuels based on their carbon intensity. These tax rates for common fuels would translate into an annual tax burden of $188 on the average household, as shown below, (right). Recall however, that under an Environmental Tax Shift (ETS) approach, this tax burden would be offset by tax relief in other areas.

The chart below illustrates the percentage increases in fuel prices resulting from a tax of $10/ton of CO₂. Prices shown are from State Energy Price and Expenditure Report 1995, U.S. Energy Information Administration.

Percentage Increase in Fuel Prices Due to Hypothetical Carbon Tax of $10/ton CO₂

The table below illustrates potential annual carbon tax revenue in Massachusetts at various tax levels. A tax of $10/ton of CO₂ corresponds to a tax of $36.67 per ton of carbon combusted. Application of a carbon tax at this level in Massachusetts would result in a total estimated annual revenue of $828.7 million. For purposes of comparison, total tax revenue in Massachusetts was $13 billion in FY97 and $14.1 billion in FY98.

The Massachusetts Department of Revenue collects the three types of taxes that provide the great majority of revenue for the Commonwealth: income taxes, sales and use taxes, and corporate/business excise taxes. The chart below indicates the 1996 revenues to the Commonwealth from each of these sources.

Carbon tax revenue would be generated from various energy use sectors. The graph below illustrates each sector’s share of total estimated revenues, based on the tax level and current energy use in each sector: