The Fiscal Implications of the US Transition Away from Fossil Fuels

Abstract

The need to reduce greenhouse gas emissions requires curtailing coal, oil, and natural gas production and consumption. However, these fuels are major revenue sources for governments. Here, we develop a novel estimate of the revenues generated by fossil fuels for all governments in the United States. Then we estimate how those revenues change under three stylized scenarios through 2050. The first is business as usual (BAU), without further controlling emissions. The second is to limit the increase in global average temperature to 2°C. The third and most ambitious climate goal is to limit the increase to 1.5°C. We estimate that fossil fuels generate $138 billion annually for US governments. Although revenues decline under all three scenarios, they fall more quickly under the ambitious climate policy. Taxes on refined petroleum products are the largest source of revenue and decline under all scenarios. Oil and gas production is the second largest and is relatively stable under the BAU and 2°C scenarios but declines rapidly under the 1.5°C scenario. Under all scenarios, coal revenues decline rapidly, approaching zero by 2040 under the 1.5°C and 2°C scenarios. These revenue shortfalls will be concentrated in certain regions. At the same time, recent estimates of climate damages easily exceed the revenue losses described in this analysis. This highlights the need for policy makers to adopt emissions-reduction strategies and also address revenue shortfalls. The policy tools to accomplish both goals are relatively straightforward. However, implementing them will require overcoming considerable political challenges.