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The Macro Effects of Anticipating Climate Policy

Author

Listed:
  • Stephie Fried

    (ASU)

  • Kevin Novan

    (University of California, Davis)

  • William Peterman

    (Federal Reserve Board of Governors)

Abstract

While the U.S. does not currently have a federal carbon tax, households could expect the government will introduce a carbon tax policy in the future. To understand how the macroeconomy responds to the expectation of a potential future carbon tax, we develop a quantitative life cycle model that allows us to focus on investment in long-lived, sector-specific assets such as coal power plants or wind farms. We find that expectations of future climate policy reduce the return dirty (carbon-emitting) energy capital, shifting the economy towards cleaner energy production. As a result, the anticipation of future climate policy reduces carbon emissions even though there is not actual policy in place. In particular, we find that a five percent probability of a \$35 dollar per ton carbon tax reduces emissions by one quarter of the amount they would fall if the carbon tax was actually in place. However, the output cost of reducing emissions through expectations of future policy are considerably higher than the output cost of the carbon tax policy itself. This is because the potential costs of reallocating capital between energy producing technologies after the tax is implemented, such as from coal power plants to wind farms, along with the uncertainty depresses savings lowering the aggregate capital stock.

Suggested Citation

  • Stephie Fried & Kevin Novan & William Peterman, 2019. "The Macro Effects of Anticipating Climate Policy," 2019 Meeting Papers 683, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:683
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    References listed on IDEAS

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    1. Caliendo, Frank N. & Gorry, Aspen & Slavov, Sita, 2019. "The cost of uncertainty about the timing of Social Security reform," European Economic Review, Elsevier, vol. 118(C), pages 101-125.
    2. 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.
    3. Julia Thomas & Berardino Palazzo & Aubhik Khan & Gian Luca Clementi, 2014. "Entry, Exit and the Shape of Aggregate Fluctuations in a General Equilibrium Model with Capital Heterogeneity," 2014 Meeting Papers 1344, Society for Economic Dynamics.
    4. Chris Papageorgiou & Marianne Saam & Patrick Schulte, 2017. "Substitution between Clean and Dirty Energy Inputs: A Macroeconomic Perspective," The Review of Economics and Statistics, MIT Press, vol. 99(2), pages 281-290, May.
    5. 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.
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