Using input–output models to estimate sectoral effects of carbon tax policy: Applications of the NGFS scenarios

Abstract

AbstractThe Network of Central Banks and Supervisors for Greening the Financial System (NGFS) has engaged in scenario analysis that estimates a $200/ton carbon tax would be required to transition to net zero carbon by 2050. Using a $200/ton carbon tax as a base, this paper uses input–output (IO) modeling to generate price and revenue effects of a carbon tax. Results from these models, which can only be interpreted as the short‐run, upper‐bound effects of the carbon tax policy, imply that in response to a $200/ton tax on CO2e emissions, carbon‐intensive industries, such as agriculture, extraction, transportation, utilities, and chemicals, may experience price increases in the range of 10‐30 percent. Other industries will also experience price increases, but to a lesser degree, due to increased input costs associated with the tax. In addition, modeling results also suggest that industries facing elastic pricing regimes may face similar‐sized declines in revenues as a consequence of the carbon tax. Rank‐ordered impact results from these models can be utilized by bank supervisors and firms to adequately plan for sectoral‐level transition risk within their lending and/or investment portfolios.