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The Economic Consequences of Delay in U.S.Climate Policy

Author

Listed:
  • Warwick J McKibbin
  • Adele C. Morris
  • Peter J. Wilcoxen

Abstract

The United States Environmental Protection Agency (EPA) has begun regulating existing stationary sources of greenhouse gases (GHG) using its authority under the Clean Air Act (the Act). The regulatory process under the Act is long and involved and raises the prospect that significant U.S. action might be delayed for years. This paper examines the economic implications of such a delay. We analyze four policy scenarios using an economic model of the U.S. economy embedded within a broader model of the world economy. The first scenario imposes an economy-wide carbon tax that starts immediately at $15 and rises annually at 4 percent over inflation. The second two scenarios impose different (and generally higher) carbon tax trajectories that achieve the same cumulative emissions reduction as the first scenario over a period of 24 years, but that start after an eight year delay. All three of these policies use the carbon tax revenue to reduce the federal budget deficit. The fourth policy imposes the same carbon tax as the first scenario but uses the revenue to reduce the tax rate on capital income. We find that by nearly every measure, the delayed policies produce worse economic outcomes than the more modest policy implemented now, while achieving no better environmental benefits.

Suggested Citation

  • Warwick J McKibbin & Adele C. Morris & Peter J. Wilcoxen, 2014. "The Economic Consequences of Delay in U.S.Climate Policy," CAMA Working Papers 2014-49, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2014-49
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-07/49_2014_mckibbin_morris_wilcoxen.pdf
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    References listed on IDEAS

    as
    1. Bento, Antonio M. & Jacobsen, Mark, 2007. "Ricardian rents, environmental policy and the `double-dividend' hypothesis," Journal of Environmental Economics and Management, Elsevier, vol. 53(1), pages 17-31, January.
    2. Reyer Gerlagh & Snorre Kverndokk & Knut Rosendahl, 2009. "Optimal Timing of Climate Change Policy: Interaction Between Carbon Taxes and Innovation Externalities," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 43(3), pages 369-390, July.
    3. Valentina Bosetti & Carlo Carraro & Massimo Tavoni, 2009. "Climate Change Mitigation Strategies in Fast-Growing Countries: The Benefits of Early Action," CESifo Working Paper Series 2742, CESifo Group Munich.
    4. McKibbin, Warwick J. & Morris, Adele C. & Wilcoxen, Peter J., 2014. "Pricing carbon in the U.S.: A model-based analysis of power-sector-only approaches," Resource and Energy Economics, Elsevier, vol. 36(1), pages 130-150.
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    More about this item

    Keywords

    fiscal policy; carbon tax; general equilibrium;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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