The FY2013 budget deficit is projected to be $845 billion, or 5.3% of gross domestic product (GDP). From 2009 through 2012, the federal budget has exceeded $1 trillion annually. While budget deficits have begun to decline, current fiscal policies remain unsustainable, and budget deficits are projected to continue. Under CBO's alternative fiscal scenario, which assumes continuation of many current policies, the deficit as a percentage of GDP is projected to decline to 3.7% by 2016, before again increasing to exceed 5% by 2022. Over time, unsustainable deficits can have negative macroeconomic consequences, including reduced savings for investment, higher interest rates, and higher levels of inflation. Restoring fiscal balance will require spending reductions, revenue increases, or some combination of the two. Policymakers have considered a number of options for raising additional federal revenues (see the text box below). One potential option is a carbon tax. Several economists and policy analysts from across the political spectrum have expressed interest in a carbon tax mechanism in recent years. Other stakeholders have expressed strong opposition to carbon tax proposals. In the 113 th Congress, Senators Sanders and Boxer have introduced legislation ( S. 332 ) that would apply carbon tax (a "carbon pollution fee") on fossil fuels and other materials, starting at $20 per ton of CO 2 emissions, rising 5.6% per year over a 10-year period. In addition, Representative Waxman and Senator Whitehouse, among others, released a carbon tax discussion draft. Their proposal would also impose a carbon pollution fee, requiring certain carbon emitters to purchase "carbon pollution permits" from the Department of the Treasury. The discussion draft requests comment on the level of the tax and on how the revenues should be used. In addition, Members proposed several carbon price systems in previous Congresses—as identified in Appendix C —most frequently as an efficient means to stimulate greenhouse gas (GHG) emission reductions. In addition, some countries have levied carbon taxes (or something similar) for over 20 years. Several Members of the 113 th Congress have expressed opposition to a carbon tax. Two concurrent resolutions introduced in the House ( H.Con.Res. 8 and H.Con.Res. 24 ) propose to express the opposition of Congress to a federal carbon tax, citing concerns about the potential negative economic impact. A similar concurrent resolution has been introduced in the Senate ( S.Con.Res. 4 ). Other policy considerations, including environmental concerns, may also lead to consideration of a carbon tax. GHG in the atmosphere trap radiation as heat, warming the Earth's surface and oceans. The key human-related GHG is carbon dioxide (CO 2 ), primarily generated through the combustion of fossil fuels: coal, oil, and natural gas. Although fossil fuels have facilitated economic growth in the United States and around the world, fossil fuel combustion has inadvertently raised the atmospheric concentration of CO 2 by about 40% over the past 150 years. Almost all climate scientists agree that these CO 2 increases have contributed to a warmer climate today, and that, if they continue, will contribute to future climate change. Many economists have argued that current fossil fuel prices reflect a market failure , because GHG emissions from fossil fuels contribute to current and future climate change, yet fossil fuel prices do not reflect climate change-related costs. Market failures distort economic efficiency by affecting consumer behavior. For example, energy consumers may make choices that are not in society's best interest, consuming more than the optimal amount of GHG emitting fuels, if prices do not reflect climate change-related costs. Carbon taxes, or GHG fees, have been proposed as one means to correct such a market failure. Another option is a cap-and-trade program, which would attach a price to GHG emissions by limiting their generation. To some extent, a carbon tax and cap-and-trade program would produce similar effects: Both would place a price on carbon, and both are estimated to increase the price of fossil fuels. Preference between the two approaches ultimately depends on which variable one prefers to control—GHG emissions or costs. A tax based on carbon content of fuels is different from a tax based on energy content, such as a Btu tax (see the text box below). Placing an emissions fee on CO 2 (and possibly other GHG emissions) could stimulate lower emissions and spur innovation in new lower-emitting technologies. A tax or fee based approach would allow markets to determine the level of investment in lower-emissions technologies. In addition, carbon tax revenues could be used to support multiple objectives, such as deficit reduction, or to replace existing taxes (e.g., payroll, income). The first section of this report examines carbon tax design and implementation issues, including the point of taxation, the rate of taxation, and the distribution of tax revenue. The second section discusses several carbon tax policy considerations: revenue potential, economic efficiency, equity, and operability. The final section highlights key issues related to the use of carbon tax revenues. Specifically, how might addressing the regressivity of a carbon tax diminish its revenue-raising potential, and what is the potential for a carbon tax to contribute to deficit reduction goals? When establishing a carbon tax, there are several implementation decisions to be considered. Key considerations include (1) the point of taxation—where to impose the tax and what to tax; and (2) the rate of taxation. Information on how a carbon tax might affect fossil fuel prices is also provided. The point of taxation would influence which entities would be required to (1) make tax payments based on emissions or emission inputs (e.g., fossil fuels), (2) monitor emissions or emission inputs, and (3) maintain records of relevant activities and transactions. The point of taxation does not necessarily reveal who bears the cost of the tax, as the cost may be passed on to intermediate producers or consumers. (This will be discussed in a later section.) GHG emissions are generated throughout the economy by millions of discrete sources: smokestacks, vehicle exhaust pipes, households, commercial buildings, livestock, etc. Although CO 2 is the primary GHG at many sources, some sources predominantly emit non-CO 2 GHGs, such as methane. When determining which sources and which GHG gases to control through a tax, policymakers would need to balance the benefits of comprehensiveness with administrative complexity and costs. Applying a carbon tax at the points of emissions from all GHG sources would present enormous logistical challenges. CO 2 emissions are fairly easy to verify from large stationary sources, such as power plants. For almost 20 years, measurement devices have been installed in smokestacks of large facilities, reporting electronic information to the U.S. Environmental Protection Agency. For smaller sources, CO 2 emissions are a straightforward and accurate calculation based on the carbon content of fossil fuels consumed. Other GHG emissions, such as methane, nitrous oxides, sulfur hexafluoride, and others, could be more difficult or less reliable to verify. Thus, administrative costs and non-compliance risks would likely increase with a broader scope of an emissions tax. However, limiting the tax scope could result in perverse effects, with sources potentially shifting processes, facility size, or location to avoid taxes. Policymakers may consider limiting the tax to sectors or sources that emit large percentages of the total U.S. GHG emissions or those that are relatively easy to measure. Or, the tax could be applied to reliable proxies for emissions in the production-to-emission chain. For example, as illustrated in Figure 1 , potential emissions could be taxed at "upstream" (e.g., wells) or "midstream" (e.g., refineries) stages in that process, taking advantage of specific chokepoints in the fossil fuel market. Alternatively, policymakers could employ a "downstream" approach, applying a carbon tax at the point where the gas is released to the atmosphere. For example, a carbon tax could be applied at sources required to report GHG emissions to EPA. In 2011, EPA collected emissions data from approximately 8,000 facilities, covering between 85% and 90% of all U.S. GHG emissions. Table A-1 (in Appendix A ) lists the top emission sources of six principal GHGs in the United States. These sources combine to account for approximately 95% of these gases (based on 2011 data). Table A-1 also provides potential points of taxation that could cover some percentage of emissions from these sources. For example, fossil fuel combustion accounts for almost 80% of total U.S. GHG emissions. To attach a price to these emissions, policymakers could apply a carbon tax to a relatively small number of entities, including petroleum refineries (115) and petroleum importers (235); coal mines (1,296) and coal-fired generators using imported coal (19); and some combination of natural gas sector entities (discussed below). Table A-1 (in Appendix A ) provides several options of points in the natural gas production-consumption chain at which a carbon tax could be applied. See Figure B-1 (in Appendix B ) for an illustration of the natural gas production-consumption chain. For example, policymakers could apply a carbon tax at natural gas wellheads and points of import. This should cover 100% of the CO 2 combustion emissions from end-users as well as emissions downstream of the extraction process (e.g., fugitive emissions, pipeline operations). Although this option would involve a large universe of entities (over 500,000), a relatively small number of operators control a large percentage of domestic production. In addition, most of the natural gas producing states levy some type of tax or fee on natural gas, many of which apply at the point of production. Some of these taxes are based on volume (i.e., cubic feet); others are based on value of the resource.