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The Macro Effects of Climate Policy Uncertainty

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Abstract

Uncertainty surrounding if and when the U.S. government will implement a federal climate policy introduces risk into the decision to invest in capital used in conjunction with fossil fuels. To quantify the macroeconomic impacts of this climate policy risk, we develop a dynamic, general equilibrium model that incorporates beliefs about future climate policy. We find that climate policy risk reduces carbon emissions by causing the capital stock to shrink and become relatively cleaner. Our results reveal, however, that a carbon tax could achieve the same reduction in emissions at less than half the cost.

Suggested Citation

  • Stephie Fried & Kevin Novan & William B. Peterman, 2021. "The Macro Effects of Climate Policy Uncertainty," Finance and Economics Discussion Series 2021-018, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2021-18
    DOI: 10.17016/FEDS.2021.018
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    1. Elizabeth Baldwin & Yongyang Cai & Karlygash Kuralbayeva, 2018. "To Build or Not to Build? Capital Stocks and Climate Policy," CESifo Working Paper Series 6884, CESifo.
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    4. Roberton C. Williams III & Hal Gordon & Dallas Burtraw & Jared C. Carbone & Richard D. Morgenstern, 2015. "The Initial Incidence of a Carbon Tax Across Income Groups," National Tax Journal, National Tax Association;National Tax Journal, vol. 68(1), pages 195-214, March.
    5. Kyle C. Meng, 2017. "Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy," American Economic Review, American Economic Association, vol. 107(3), pages 748-784, March.
    6. van der Ploeg, Frederick & Rezai, Armon, 2020. "The risk of policy tipping and stranded carbon assets," Journal of Environmental Economics and Management, Elsevier, vol. 100(C).
    7. Lucas Bretschger & Susanne Soretz, 2018. "Stranded Assets: How Policy Uncertainty affects Capital, Growth, and the Environment," CER-ETH Economics working paper series 18/288, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    8. Stephie Fried & Kevin Novan & William Peterman, 2018. "The Distributional Effects of a Carbon Tax on Current and Future Generations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 30-46, October.
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    Cited by:

    1. Ryan Rafaty & Geoffroy Dolphin & Felix Pretis, 2020. "Carbon Pricing and the Elasticity of CO2 Emissions," Working Papers Series inetwp140, Institute for New Economic Thinking.

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    More about this item

    Keywords

    Climate Policy; Policy Uncertainty;

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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