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Climate Policy

Paper Session

Sunday, Jan. 7, 2024 10:15 AM - 12:15 PM (CST)

Grand Hyatt, Bonham D
Hosted By: Association of Environmental and Resource Economists
  • Chair: Joe Aldy, Harvard University

Equity and Risk in the Social Cost of Carbon: Evidence from GIVE

David Anthoff
,
University of California-Berkeley
Frank Errickson
,
Princeton University
Brian Prest
,
Resources for the Future
Lisa Rennels
,
University of California-Berkeley
Kevin Rennert
,
Resources for the Future
Jordan Wingenroth
,
Resources for the Future

Abstract

This paper presents two novel results from the Greenhouse Gas Impact Valuation Estimator (GIVE) integrated assessment model (IAM). First, we extend the GIVE model to estimate an equity-weighted social cost of carbon (SCC) following the methodology of Anthoff et al. (2009). Second, we analyze the risk-adjusted discount rate that is implicitly used in GIVE. GIVE is a new IAM introduced in Rennert et al. (2022) that implements all the near-term recommendations from the NAS report on the SCC (NAS 2017). The US EPA has recently leveraged GIVE in its new official SCC for use by the federal government.

Germany’s official SCC has long used equity weighting, and recently the Biden administration proposed updated guidance that may open the door to it as well, amid a lively debate whether equity weighting ought to be used for the federal government’s SCC. Our equity-weighted estimates thus fill an important gap in the usefulness of GIVE for policy applications.

In addition, we conduct an in-depth exploration of the risk treatment of GIVE’s SCC estimates. A standard result in climate change economics is that the risk-free discount rate declines over time (Weitzman 1998). However, marginal damages in IAMs are rarely risk-free. The classical asset pricing framework approach to valuing risk accounts for the covariance of the payoff (here, marginal damages) with the stochastic discount factor (SDF). The GIVE model is well-suited to explore this due to its comprehensive treatment of uncertainty. We show that while 1) GIVE’s risk-free discount rate falls over time (a la Weitzman), we nonetheless find that 2) that the risk-adjusted discount rate increases over time due to the payoff-SDF covariance (a result foreshadowed by Gollier 2014 in a theoretical setting). We explore the implications of these adjustments

Is Broader Always Better? Tax Distortions, Emissions Elasticities, and the Scope of Emissions Pricing

Lawrence H. Goulder
,
Stanford University
Marc A.C. Hafstead
,
Resources for the Future
Roberton C. Williams III
,
University of Maryland

Abstract

Economists often regard a broad-based price on carbon (whether in the form of a carbon tax or cap and trade) as the most efficient policy to reduce carbon dioxide emissions. Relative to a narrower tax that omits some emissions sources, a broader policy is often favored because it can exploit more low cost emissions-reduction opportunities and cause less emissions leakage to uncovered sources. However, some narrower carbon tax approaches have gained considerable political support, in part because they can avoid raising prices of outputs (like gasoline) regarded as especially critical to household budgets.

Some analysts might lament any shift away from broad carbon pricing, citing potential efficiency costs. However, this paper offers theory and numerical simulations that reveal that such a shift need not involve an efficiency sacrifice.

This result exploits the fact that sectors differ in the extent to which they involve distortions from their pre-existing taxes and in the elasticity of the sector’s emissions to the carbon price. Our analytical model reveals that a carbon price policy that excludes sectors with either relatively high tax-related distortions or with a relative elasticity of emissions with respect to the price can be more cost-effective than a policy with a broad (economy-wide) tax base.

Our numerical model of the US economy then compares quantitatively the impacts of an economy-wide carbon price with those of a range of narrower policies, including policies that apply only to the power sector and policies that exempt certain sectors or goods (e.g., gasoline). We make these comparisons under a range of specifications for policy stringency, and find that the ratio of the broader policy’s cost to the narrower one’s declines with the ambitiousness of the CO2-reduction target and the magnitude of the price needed

Firm Heterogeneity, Industry Dynamics and Climate Policy

Ara Jo
,
University of Bath
Christos Karydas
,
ETH Zurich

Abstract

We develop a dynamic general equilibrium model with heterogeneous firms to investigate the interaction between climate policy, industry dynamics, and the elasticity of substitution between clean and dirty energy. A central economic force is the selection between firms that differ in their flexibility to switch from dirty to clean energy and the endogenous exit of least flexible firms in response to climate policy. We discipline the parameters of our model using micro data from French manufacturing firms and macro data on production and innovation in the energy sector. Accounting for industry dynamics leads to a substantial reduction in the optimal carbon tax and improves welfare. The aggregate elasticity of substitution improves endogenously due to the exit of inflexible firms, increasing the effectiveness of policy at reducing emissions. Further, industry dynamics free up labor from inflexible firms to be used in the clean energy sector and lead to stronger innovation response.

A Policy Framework for Carbon Dioxide Removal

James Boyd
,
Resources for the Future
Emily Joiner
,
Resources for the Future
Alan Krupnick
,
Resources for the Future
Michael Toman
,
Resources for the Future

Abstract

Continuing global growth in GHG emissions has led to growing concern that capping the average temperature increase at 1.5°C is becoming infeasible without aggressive use of carbon dioxide removal (CDR) (van Diemen et al, 2022; Smith et al, 2023). However, little has been done in the US or other countries to develop a policy framework for substantially and sustainably expanding CDR.

This paper analyzes the key ingredients necessary for such a policy framework, addressing the following questions:
• What incentive policies can induce large-scale, cost-effective, long-term private provision of CDR?
• What sequencing of policies (Pahle et. al, 2018) can effectively initiate transition to greatly increased use of CDR?
• What is the role for government financing of CDR, both nearer- and longer-term?
• What policies will effectively lower the cost of CDR technologies?
• How do CDR and GHG mitigation policies interact?
• What other measures are needed for the effects of CDR on public health, safety, and the environment?
• What measures are needed to regulate pipeline transport of captured CO2 to underground storage reservoirs?

CDR encompasses both nature-based solutions like forest carbon storage (Friedlingstein et al, 2019), and “engineered” solutions like Direct Air Capture (McQueen et al, 2021). The paper discusses the distinct challenges encountered in scaling up these approaches, novel options for incentive-based policies to scale-up engineered approaches (Becattini et al 2022, Lundberg and Fridahl 2022), mechanisms for stimulating innovation in those approaches, coordination of CDR and emissions mitigation policies, and ancillary policy requirements for safety, health, environmental, and competition protection.

Discussant(s)
Frances C. Moore
,
University of California-Davis
Ruozi Song
,
World Bank
Gregory Casey
,
Williams College
Joe Aldy
,
Harvard University
JEL Classifications
  • Q5 - Environmental Economics
  • H2 - Taxation, Subsidies, and Revenue