How CBO Estimates the Cost of Climate-Change Legislation: Explaining the "25 Percent Offset"
Publication Date: May 2008
Special Collection: John D. and Catherine T. MacArthur Foundation
Keywords: Economic projections; Fiscal future; Federal budget
When the Congressional Budget Office prepares cost estimates for climate-change legislation, those estimates reflect what is known as a "25-percent income and payroll tax offset." As a result of this offset, the net revenue estimated to be generated by an auction of emissions allowances under a cap-and-trade program or by a carbon tax is 25 percent smaller than the estimated gross proceeds from the auction or carbon tax alone. This offset arises because, consistent with longstanding cost-estimating procedures, CBO assumes that the overall amount of revenue the federal government receives from income and payroll taxes will decline by an amount equal to 25 percent of the proceeds it gets from auctioning emissions allowances or imposing a carbon tax.
This paper explains why the Congressional Budget Office "scores" climate-change legislation in this manner.