Blog Post

Economic Growth and Carbon Taxes

Sep 6, 2013 | Raymond J. Kopp

I believe it’s time to end the discussion of the impact a carbon tax would have on US economic growth. To me the question is settled – it has no substantive impact. A new study by scholars at RFF shows that a substantial, broad-based, revenue-neutral tax on carbon dioxide emissions would have imperceptible effects on macroeconomic growth as measured by GDP. This is the same result as that reported by scholars at MIT in 2012 using an entirely different model of the US economy, and the same result reported earlier this year by scholars at the Brookings Institution using yet another model of the US economy.

The RFF study considers a $30/ton tax on CO2 emissions imposed in 2015 and remaining at $30 through 2050. The tax raises $2.25 trillion over a 10-year budget window. The funds from the CO2 tax are used in a revenue neutral manner in four different analyses to finance tax rate reductions on; 1) capital, 2) labor, and 3) consumption. In the fourth analysis the carbon tax revenues are redistributed back to households. In all four analyses federal spending remains unchanged.

While each of the four revenue recycling options has a different impact on GDP, some positive and some negative, all the impacts are trivially small. In the case of reductions in capital taxation GDP rises 1% in 2050. Using Energy Information Agency Administration predictions of GDP in 2040 ($27 trillion) the carbon tax causes GDP to rise by $270 billion in 2040, implying the tax has caused the rate of GDP growth to increase from 2.50% to 2.53%—a trivial and likely statistically insignificant increase.

On the other hand, the remaining three recycling studies suggest GDP decreases. The largest decrease comes with the lump-sum payments to households and in this case GDP in 2040 falls by $900 billion and causes the growth rate to decline from 2.50% to 2.36% - again a trivial impact. In all cases GDP with or without the tax is expected to double from $13 trillion to $26 trillion.

There is still reason to argue about sectoral and demographic impacts of a moderate ($25-$50/ton) revenue neutral carbon tax, but no reason believe the macro impacts deserve more scholarly attention or political concern. On the other hand, carbon taxes that are not revenue neutral or far exceed the $25-50/ton range would require additional analysis before claims regarding their macro performance can be made.