Abstract
I examine the general equilibrium costs of climate policies that levy taxes on carbon dioxide (CO2) emissions in the United States and return the revenue in the form of lump-sum rebates and tax relief over the years 2020 to 2040 using the US regional version of the Applied Dynamic Analysis of the Global Economy (ADAGE-US) forward-looking dynamic Computable General Equilibrium (CGE) model. I approximate the value of co-benefits to these policies that arise from concomitant reductions in nongreenhouse gas (GHG) emissions using the CO-Benefits Risk Assessment model (COBRA). There is significant heterogeneity in costs and co-benefits from climate policies across space and income. Policy costs are generally less than 0[Formula: see text]5% in equivalent variation terms (between a few tens of dollars and several hundred per household, depending on the income quintile), can be fully neutralized for the lowest- quintile households at a modest increase in overall policy cost, and tend to be lower for upper-quintile households in coastal regions. The policy co-benefit values range widely across regions, approximately $150–1250 per household, exceeding the gross cost of the policy for many households, particularly those in the Midwest. Last, I identify a marginal welfare cost of $58[Formula: see text]tCO2 and a marginal co-benefit of $31[Formula: see text]tCO2 at a national level over all households, which implies a required climate benefit of $27[Formula: see text]tCO2 or less to justify the level of abatement achieved by a $25[Formula: see text]tCO2 tax growing at 5%.
Highlights
Calls for climate policy in the private sector and Congress have increasingly focused on taxing carbon over other alternatives, such as capping and trading it or mandating technology-specific emissions rates
While the national welfare impacts identified here are consistent with prior findings (Nemet et al, 2010), disaggregating policy outcomes reveals considerable heterogeneity in costs and co-benefits of carbon taxation that is relevant to optimal policy design
Reduced mortality risk accounts for the vast majority of benefits (99%), so the tangible value of benefits is relatively small and comes from reduced medical expenditures for those suffering from pollution-related morbidities such as asthma or chronic obstructive pulmonary disease (COPD)
Summary
Calls for climate policy in the private sector and Congress have increasingly focused on taxing carbon over other alternatives, such as capping and trading it or mandating technology-specific emissions rates. The value of the tax and the use of the revenue it raises have significant influence on the level and distribution of economic costs that will be borne by households and firms. Results from ADAGE-US suggest that the level and distribution of the policy’s cobenefits vary with tax levels and show considerable spatial variation, but they are relatively insensitive to how the revenue is used.. While the national welfare impacts identified here are consistent with prior findings (Nemet et al, 2010), disaggregating policy outcomes reveals considerable heterogeneity in costs and co-benefits of carbon taxation that is relevant to optimal policy design. The higher spatial and economic resolution of policy costs and co-benefits contributed by this research can support the formation of carbon policies that mitigate undue impacts on particular groups. The efficiency analysis demonstrates how policy co-benefits can substantially reduce or even eliminate the net economic cost of climate policy even absent consideration of the policy’s climate benefits
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