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

35 Pages Posted: 2 Jul 2014 Last revised: 9 Jul 2014

See all articles by Warwick J. McKibbin

Warwick J. McKibbin

Australian National University

Adele C. Morris

The Brookings Institution

Peter Wilcoxen

Syracuse University

Date Written: July 1, 2014

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.

Keywords: fiscal policy, carbon tax, general equilibrium

JEL Classification: Q54, H2, E17

Suggested Citation

McKibbin, Warwick J. and Morris, Adele C. and Wilcoxen, Peter, The Economic Consequences of Delay in U.S. Climate Policy (July 1, 2014). CAMA Working Paper No. 49/2014, Available at SSRN: https://ssrn.com/abstract=2461506 or http://dx.doi.org/10.2139/ssrn.2461506

Warwick J. McKibbin (Contact Author)

Australian National University ( email )

Crawfrod School of Public Policy
Canberra, ACT 2600
Australia
02-61250301 (Phone)
02-62735575 (Fax)

HOME PAGE: http://www.sensiblepolicy.com

Adele C. Morris

The Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

HOME PAGE: http://www.brookings.edu/experts/morrisa.aspx

Peter Wilcoxen

Syracuse University ( email )

426 Eggers Hall
Syracuse, NY 13244-2130
United States

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