The Fiscal Implications of the US Transition Away from Fossil Fuels

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 estimate how those revenues change under three stylized policy scenarios through 2050: business-as-usual, 2°C, and 1.5°C. We estimate that fossil fuels generate $138 billion annually for all US governments and that these revenues are likely to decline even in the absence of new climate policy. Petroleum product taxes are the largest source and decline under all scenarios. Oil and gas production, the second largest, 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. Recent estimates of climate damages easily exceed the revenue losses described in this analysis, highlighting the need for policymakers to adopt emissions reduction strategies while also addressing revenue shortfalls, which will be concentrated in certain regions. The policy tools to accomplish both goals are relatively straightforward, but implementing them will require overcoming considerable political challenges.