Friday, June 17, 2016

Macroeconomic Analysis of Federal Carbon Taxes

An economy-wide federal carbon tax can significantly reduce US carbon dioxide emissions but will also impact the US economy. A modeling exercise examines these macroeconomic impacts and demonstrates the effects of the tax on consumer prices and welfare. 

Key Findings
  • A carbon tax can substantially reduce carbon emissions at a relatively low cost.
  • How the carbon tax revenue is used matters. Using the revenues to reduce existing taxes, such as the corporate income tax, significantly reduces the cost of the policy compared to lump-sum rebating of the revenues to households.
  • The welfare cost per ton of carbon dioxide reduced is significantly below central estimates of the social cost of carbon when the carbon tax revenues are used to reduce corporate income taxes.
  • Based on our estimates, using carbon tax revenues to reduce corporate income taxes would pass a cost–benefit test by a significant margin. 
The purpose of this policy brief is to report some results from a modeling exercise of an economy-wide tax on CO2 emissions where the tax level is designed to be in line with recently revised estimates of the social cost of carbon. The exercise was performed using the E3 computable general equilibrium (CGE) model of the United States with international trade. The E3 model, developed by Lawrence Goulder of Stanford University and Marc Hafstead of RFF, divides US production into 35 industries, with a particular emphasis on energy-related industries such as crude oil extraction, natural gas extraction, coal mining, electric power (represented by four industries), petroleum refining, and natural gas distribution. The model provides a detailed tax treatment, allowing for interactions of environmental policy and preexisting taxes on capital and labor.
The overall welfare cost of emissions reductions in the lump-sum rebate scenario is about $46 per ton, whereas the welfare cost in the case with a corporate income tax cut is about $31 per ton. This cost equates to 0.81 percent or 0.53 percent of total discounted household spending between 2016 and 2030. ... As shown in a separate analysis, a similar tax would cause 2030 CO2 emissions to fall more than 40 percent below 2005 levels while causing a loss of consumption of less than 0.18 percent. 
Find more analysis by RFF experts on the impacts of a US carbon tax:
Resources For the Future (RFF)
Policy Brief 16-06 | June 13, 2016 | 5 pages

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