How Durable is a Lockbox for Carbon Tax Revenue?

Abstract

Debates about carbon taxes in political and policy circles inevitably involve discussions about how to use the revenue from carbon taxes. Choices about revenue use will turn on the complex interaction of political strategies, the broader fiscal picture, equity and economic concerns, and environmental considerations. The ultimate choice will mold policymakers’ promises to constituents and the public as they describe and promote carbon taxes. Those promises become particularly important when they purport to dedicate the revenue to a specific purpose. Voters and stakeholders will wonder whether promises can and will be kept. Can the revenue actually be put into a secure lockbox to ensure that the revenue is used as promised? Will that lockbox endure over time?

This article considers the legal durability of promises to earmark carbon tax revenue. It focuses on three types of revenue dedication: revenue-neutral tax reform, revenue recycling through “dividends” or rebates, and dedication of revenue to spending on climate-related matters. It explores the legal design of these alternatives. It also analyzes how the legal context, such as budget rules and procedures, may influence whether promises are kept in the short and long terms. While drawing on examples of carbon pricing measures and proposals in North America, the article strives to identify issues that may apply in other countries as well. Regardless of jurisdiction, policymakers and carbon tax advocates should consider whether their rhetorical promises can translate into legally durable reality. The article does not advocate for specific policy or political choices about how to use carbon tax revenue. It seeks instead to help inform choices and future research.