Skip to main content
Transportation Funding & Financing

Carbon Tax/Cap and Trade Program

In the context of surface transportation, a national carbon tax would essentially be a penalty for the amount of emissions produced by a vehicle, most likely translated into an added cost per gallon on fuel imposed by the Federal government (presumably through the existing motor fuel tax collection mechanism). Similarly, a cap and trade program likely would mean that large carbon users (e.g., motor fuel producers) would buy offsets associated with the carbon their products produce, which would then be passed on to a user in the form of higher motor fuel costs.

The amount of revenue a carbon tax may generate depends on the approach used to set the tax rate and the way in which the tax would be implemented. For example, motor fuels emit, on average, about 20 pounds of carbon dioxide per gallon used. Using the current European spot price for carbon dioxide at $30 per ton, this translates into a motor fuels carbon tax of roughly 30 cents per gallon. Less aggressive estimating approaches suggest that a carbon tax of 10 to 13 cents per gallon would begin to have desired effects in reducing motor fuels consumption. Either way, a carbon tax has the potential to generate a large amount of funding ($18 billion to $54 billion annually). Assuming 15 percent of this revenue is allocated to surface transportation, revenues in 2010 could be $2.7 billion to $8.1 billion.

In the case of a carbon trading system, revenue would depend on the amount of allowable carbon emissions, the cost to produce non-carbon alternatives, and the amount of carbon allowances permitted for auction (as opposed to allowances grandfathered to existing users). It is important to note the long timeframe envisioned for collection of any revenue from a cap and trade system; such a program would not be a feasible option in the short term.