- Investigates the causes of economic imbalances.
- Investigates the effect of the global financial system and/or the monetary system in fostering a sustainable economy.
- Investigates causes tending to destroy or impair the free-market system.
- Explores and develops market-based solutions.
In this project, Brookings scholars will use the G-Cubed model of the global economy to compare a U.S. carbon tax with approaches the U.S. Environmental Protection Agency (EPA) could take in regulating carbon pollution from the power sector. Different pollution control policies, even if they achieve the same cumulative emissions goal, could have importantly different effects on the composition of the energy sector and overall economic outcomes. This project will analyze alternative policy options with an eye to informing the development of EPA rules and comparing the outcomes of carbon pricing to regulatory approaches.
Delaying climate policy increases its cost or lowers its benefits, and implementing a carbon tax now could significantly strengthen the economy if the revenue is used to reduce distortionary taxation elsewhere in the economy, according to the paper by economists with the Climate and Energy Economics Project at Brookings
Yesterday, the U.S. Environmental Protection Agency (EPA) proposed to limit carbon emissions from power plants, but the complexity and contentiousness of such regulations could mean that significant U.S. action is years away. In The Economic Consequences of Delay in U.S. Climate Policy
, Brookings scholars Warwick McKibbin
, Adele Morris
, and Peter Wilcoxen
study an economy-wide carbon tax – i.e., not just on power plants but on all fossil energy carbon – imposed with different timing but with the same cumulative emissions goal. They find that “by nearly every measure, the delayed policies produce worse economic outcomes than the more modest policy implemented now, while achieving no better environmental benefits.” While they find that although the timing of the policy matters, other policy design features, particularly how the revenue of a carbon tax is used, can matter significantly more.
The study analyzes four policy scenarios with an economic model of the U.S. economy embedded within a broader model of the world economy. The first policy imposes a carbon tax that starts now at $15 per ton of CO2
and rises annually at 4 percent over inflation until leveling out at $67 at year 40 and thereafter. The second two scenarios impose different (and more stringent) carbon tax trajectories after an eight year delay (one scenario starts at a higher carbon tax rate and the other grows more quickly). All three of these policies use the carbon tax revenue to reduce the federal budget deficit, and they all achieve the same cumulative emissions reductions over 24 years. The fourth policy simulation imposes the same carbon tax as the first scenario, but uses the revenue to reduce the tax rate on capital income rather than the federal budget deficit.
The economic costs of such policies are modest relative to economic growth, and the environmental gains are significant (a total reduction of 19 billion tons of carbon dioxide over 24 years). Acting now and using the carbon tax revenues to reduce the deficit would only delay achievement of the baseline GDP for year 23 by about a month. The authors find that an eight year delay in implementing a carbon tax requires a starting tax rate that is 70 percent higher than one that starts now ($25.50 vs. $15) or a rate of increase that is more than twice as fast (10 percent annually vs. 4 percent) to achieve the same environmental benefits. A delay followed by accelerating carbon prices raises the economic cost by 14 percent relative to acting now, as measured by the discounted present value of gross national product. The carbon tax also impacts different sectors of the labor market differently, hitting the power industries hardest (coal, gas extraction, and electric utilities) given that fossil energy demand would fall as a result of increased prices due to the tax.
In contrast to the first three scenarios, the scenario in which the carbon tax revenue is used to reduce the tax rate on capital income produces an increase
in economic activity, including in GDP, investment, and employment. Acting now and using the revenue for tax reform produces slightly smaller reductions in emissions (16 instead of 19 billion metric tons of CO2
) but would accelerate economic growth and allow the economy to reach baseline GDP for year 23 about 4 months early.
The authors also show that the three carbon tax/deficit reduction policies could cause short run employment to fall relative to baseline by about one-quarter of a percent, but if the tax is adopted now, employment returns to baseline levels within 15 years, even as the carbon tax continues increasing. As workers and capital move around the economy, the initial loss of jobs in those sectors can be offset by the creation of new jobs in the non-energy sectors, particularly in the durable and non-durable manufacturing sectors and the service sector. Employment overall does not fall in absolute terms in any of those scenarios; it just grows slightly less fast than it otherwise would, they write.
“We find that delaying the policy causes greater disruptions throughout the economy because the carbon tax must be higher or must rise more quickly to achieve the same emissions goal. A policy adopted now has much smaller price and output effects than the delayed policies, particularly relative to the policy that starts at a higher tax rate. A sharp but delayed increase in the tax is significantly more disruptive for the energy sector (especially the coal industry) than a policy that begins sooner but with more modest taxes,” they conclude.
This grant will contribute directly to the Walker Foundation’s purposes:
• It investigates policies to address the market failure associated with climate changes.
• It investigates solutions to foster a more sustainable economy, both fiscally and environmentally.
• It explores how to incorporate the costs of environmental damage into prices and economic incentives, an inherently market-based approach, in lieu of command and control pollution regulation.
• It focuses on the communication of the results and findings to policymakers, stakeholders, and the public.
Using the G-Cubed model of the global economy, Brookings scholars will model an illustrative federal carbon tax and potential regulatory policies that achieve the same environmental outcomes. They will compare and contrast the results of the policy scenarios, including the different effects on energy efficiency, the mix of generation technologies including renewables and nuclear power, electricity consumption, electricity prices, and overall economic outcomes.
The objective of this work is to inform the development of EPA rules and illustrate how the outcomes of traditional regulatory approaches differ from each other and from a carbon tax imbedded in broader fiscal reform.
The findings were published to the Brookings website, was mentioned in an Economic Studies newletter, and a press release was sent to a targeted list of reporters. The paper was covered in news outlets including Bloomberg Businessweek, Yahoo!Finance, E&E ClimateWire, Media Matters blog, an editorial in Bloomberg View, and was a top downloaded paper that week on the Social Science Research Network site. Next month Adele Morris will present the paper Harvard at the Environmental Economics seminar series. Morris, McKibbin, and Wilcoxen also plan to submit it to a journal.
Project Link http://www.brookings.edu/research/papers/2015/08/03-controlling-carbon-emissions-power-plants-mckibbin-morris-wilcoxen
(Check sent: 7/10/2014)