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Carbon Tax Policy

Paper Session

Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PST)

Marriott Marquis, Grand Ballroom 5-6
Hosted By: American Economic Association
  • Chair: Joseph E. Aldy, Harvard University

Measuring the Macroeconomic Impact of Carbon Taxes

Gilbert Metcalf
Tufts University and NBER
James Stock
Harvard University


This paper carries out an empirical analysis of carbon taxes in Europe to estimate their impact on GDP growth rates and employment. The results here show some evidence of transitional dynamics. We find that typically the carbon tax has positive effects on GDP growth and, initially, on employment. The positive effects are in some cases statistically significant but generally are not, so that the estimated growth effects are consistent with no effect of the tax on the growth rates of GDP or employment. We find no robust evidence of a negative effect of the tax on employment or GDP growth. For the European experience, at least, we find no support for the view that carbon taxes have adverse growth or employment impacts.

The Fiscal Costs of Climate Change

Lint Barrage
University of California-Santa Barbara and NBER


This paper explores the policy implications of climate change's fiscal impacts. Public budgets may be exposed to the climate through both existing program costs (e.g., disaster assistance, health care) and the need for publicly funded adaptation (e.g., seawalls). However, benchmark integrated assessment models used to estimate the social cost of carbon (e.g., DICE, Nordhaus,1992, 2017; FUND, Anthoff and Tol, 2014, etc.) typically do not distinguish fiscal costs as such. This paper thus introduces public climate expenditures into the COMET, a dynamic general equilibrium climate-economy model which extends the seminal DICE framework with representations of linear distortionary taxes and government spending (Barrage, 2018). In this setting, fiscal impacts can alter the welfare costs of climate change through multiple channels. Diverting or raising public funds with distortionary taxes is socially costly. Fiscal constraints may moreover reduce adaptation, increasing climate damages relative to what standard models may predict. The quantifcation of fiscal costs is based on the prior literature and original estimates where possible. For example, for hurricanes, U.S. fiscal cost estimates exist for direct disaster relief (Congressional Budget O¢ ce, 2016) and general transfers (Deryugina, 2017). This paper further utilizes IMF Government Finance Statistics and global cyclone records to produce estimates for other countries, and combines these with projected changes in future cyclone probability
distributions (from Bakkensen and Barrage, 2019, as based on Emanuel et al., 2008).
The [preliminary and incomplete] results suggest that accounting for fiscal impacts may in-
crease the welfare gains from carbon taxation by up to a factor of two. Specifically, the estimated welfare gains from optimal global carbon pricing in the 21st century increase from $10.8 trillion ($2005) in a standard setting without distortionary taxation to $11.4-20.3 trillion, depending on the fiscal scenario.

The Welfare Implications of Carbon Price Certainty

Joseph E. Aldy
Harvard University and NBER
Sarah Armitage
Harvard University


Any effective climate change program will need to drive substantial investment in long-lived capital, such as wind farms, electric vehicles, bio-refineries, energy-efficient buildings, etc. The incentives to abate carbon dioxide emissions by undertaking this investment vary under alternative policy instruments. We integrate real options and instrument choice frameworks to illustrate the welfare consequences of pricing carbon through a tax policy as opposed to cap-and-trade or regulatory tools. Consider the problem a firm faces in complying with either an emission tax or a cap-and-trade program. Under a tax, the firm learns the tax rate, determines the marginal abatement costs of its mitigation options, and then makes investments to minimize its tax bill plus abatement costs. Under cap-and-trade, the firm learns the emission cap and allowance allocation, determines the marginal costs of its abatement options, forms an allowance price expectation, and then makes investments to minimize the sum of expected allowance purchases and abatement costs. Uncertainty over expected allowance prices could result in investment that may be ex ante optimal, but sub-optimal ex post. This is the intrinsic instrument uncertainty of cap-and-trade. This uncertainty is aggravated by overlapping policies – such as California utilities facing a cap-and-trade program, renewable power mandates, and energy efficiency requirements – as well as public discussion of future changes to the cap-and-trade program – such as EU deliberations in recent years – each of which can influence allowance prices, but not carbon tax rates. We build a model of U.S. carbon abatement with long-lived investment that permits comparison of policy instruments, where we focus on carbon tax and cap-and-trade (with allowance banking). We calibrate our investment functions to the recent Stanford Energy Modeling Forum U.S. carbon tax exercise.
Meredith Fowlie
University of California-Berkeley
Roberton Williams III
University of Maryland and NBER
Garth Heutel
Georgia State University and NBER
JEL Classifications
  • Q5 - Environmental Economics
  • H2 - Taxation, Subsidies, and Revenue