Carbon pricing will raise costs for governments, but policies can be designed to maintain their purchasing power along with the incentive to reduce their carbon footprints.

If and when the United States puts a cap or tax on carbon emissions as part of the effort to address global climate change, this will increase the prices of fossil fuels, significantly impacting not only household consumers but also local, state and federal governments. Households can be ‘made whole’, in the sense that whatever amount the public pays in higher fuel prices is recycled to the public, by means of a carbon dividend policy. Individual households will come out ahead or behind in monetary terms depending on whether they consume below-average or above-average amounts of carbon. Here we consider policy options for ‘keeping the government whole’, too, policies to ensure that additional revenues to government compensate adequately for the additional costs that result from the carbon price.

The price impacts of a carbon cap will be felt by federal, state and local governments. The prices of heating oil and coal-fired electricity will rise for schools and other public buildings, just as they will rise for homeowners. The prices of gasoline and diesel will rise for the Pentagon and other government agencies, just as they will for private citizens. To keep the government whole–to maintain real government spending and services at current levels–government revenues would need to grow correspondingly.

In this chapter we analyse two policy options for keeping the government whole: