The Economic Costs and Co-Benefits of Carbon Taxation: A General Equilibrium Assessment

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%.

DISTRIBUTIONAL IMPLICATIONS OF A NATIONAL CO2TAX IN THE U.S. ACROSS INCOME CLASSES AND REGIONS: A MULTI-MODEL OVERVIEW

“…Of the models participating in the EMF 32 modeling exercise, four allow for the consideration of effects across income groups. These are DIEM (Ross, 2014a,b, 2018), USREP-ReEDS (Rausch and Mowers, 2014; Caron et al , 2018), ADAGE (ADAGE-US) (Ross, 2009; Woollacott, 2018), and IGEM (Jorgenson et al , 2012, 2013, 2018). These and a fifth model, NewERA (Tuladhar et al , 2012), are able to consider the effects across U.S. regions.…”

Electric sector policy, technological change, and U.S. emissions reductions goals: Results from the EMF 32 model intercomparison project

“…The health benefits of reductions in SO 2 and NO x are often substantial, with the short-term health benefits often similar in magnitude to, or greater than, the near-term abatement costs (e.g., Woollacott, 2018;Buonocore et al, 2016;Thompson et al, 2014;West et al, 2013;Nemet et al, 2010).…”

The Impact of Carbon Taxation and Revenue Recycling on U.S. Industries

“…While emissions abatement provides a relative indication of which policies are likely to generate more benefits, physical units of abatement offer no guidance on the level or marginal economic value of that abatement such that one could perform cost-benefit assessments. Moreover, research indicates that co-benefits from climate policy may be substantial (e.g., West et al, 2013;Woollacott, 2018), but this remains a valuable area of further research. This is particularly true given the spatial and potential economic heterogeneity of co-benefits, which could significantly influence a policy's net benefits.…”