A permit trading program for carbon dioxide (Cap and Trade)

February 18, 2014

A permit trading program for carbon dioxide (Cap and Trade)


According to the dictum “tax waste, not work," Illinois could avoid some increase to the personal income tax on productive labor efforts by instead taxing pollution emissions that contribute to climate change. This short paper investigates likely effects of a tax on emissions or an equivalent cap-and-trade permit system with permits sold by the state instead of being handed out for free.

Following the example of the California plan already enacted, Illinois could reduce future deficits by about $2 billion per year using a price of $10 per ton of carbon dioxide. It might raise gasoline prices by about ten cents per gallon (about 3 percent). It might raise the cost of using coal to generate electricity by about 10 percent, where half of electricity in Illinois is generated from coal.

The paper explains why that cost will likely reduce returns to out-of-state shareholders of electric generating companies instead of raising electricity prices or reducing jobs in Illinois. Thus, Illinois residents’ burdens from this emissions tax would probably be less than their burdens from collecting the same revenue using an income tax or sales tax.


(.PDF 487.85 KB)

Research Area: Fiscal and Economic Policy

Policy Initiative: none