The cost of climate policy in the United States

Abstract

We re-evaluate prospects for US economic growth and the likely costs of advanced technologies given recent developments, and then apply the MIT Emissions Prediction and Policy Analysis (EPPA) model to evaluate three core GHG policy scenarios for the US that cap emissions at different levels. The three policy scenarios involve allowance allocations that through 2050 are: (1) constant at present emissions levels, (2) linearly reduced to 50% below present, (3) linearly reduce emissions to 80% below present. The cumulative allowance allocations over the horizon of the policy are 287, 203 and 167 Gt of CO 2 equivalent, respectively. We compare the results to previous analysis of these same policy scenarios to evaluate how the changed growth and technology prospects affect the results. We focus on 203 and 167 Gt scenarios because current proposals envision deep cuts in emissions from present. The 167 Gt scenario is closest to proposals currently being considered by Congress and supported by the US Administration however we do not attempt to model specific details of actual proposals. We test results to alternative assumptions about program coverage and banking behavior. Measured in terms of changes in economic welfare, the economic cost of 203 and 167 Gt cases is in the range of 2 to 3% by 2050, with CO 2 prices between $48 and $67 in 2015 rising to between $190 and $266 by 2050. Implementation details matter: when an idealized economy-wide cap-and-trade is replaced by coverage omitting some sectors, or if the credibility of long-term target is weak (limiting banking behavior) prices and welfare costs change substantially.