WASHINGTON—Resources for the Future (RFF) today posted a new policy brief on the costs of a national carbon tax for reducing carbon dioxide (CO2) emissions to help meet environmental goals. The authors are RFF Fellow Marc Hafstead, RFF University Fellow Lawrence Goulder of Stanford, and RFF Senior Fellows Raymond Kopp and Roberton Williams III.
Raymond Kopp, co-director of RFF’s Center for Energy and Climate Economics, said, “Many experts believe that a federal carbon tax is the most economically efficient way to reduce CO2 emissions. It is important that policymakers in Washington and the states understand the implications.
“Through modeling developed and carried out by both RFF and Stanford University,” Kopp added, “we were able to yield meaningful results through 2035. The study posted today supports the thesis that an effectively designed carbon tax program can produce large emission reductions relatively affordably through that timeframe.”
The study, Macroeconomic Analysis of Federal Carbon Taxes, is based on modeling of an economy-wide tax on CO2 emissions designed to be in line with recently revised estimates of the social cost of carbon. The exercise was performed using the E3 model developed by Lawrence Goulder and Marc Hafstead. The model divides US production into 35 industries, with a particular emphasis on energy-related industries such as crude oil extraction, natural gas extraction, coal mining, electric power, petroleum refining, and natural gas distribution.
Among the key points:
- A carbon tax can substantially reduce carbon emissions at a relatively low cost.
- How the carbon tax revenue is used matters. Using the revenues to reduce existing taxes, such as the corporate income tax, significantly reduces the cost of the policy compared to lump-sum rebating of the revenues to households.
- The welfare cost per ton of carbon dioxide reduced is significantly below central estimates of the social cost of carbon when the carbon tax revenues are used to reduce corporate income taxes.
- Based on our estimates, using carbon tax revenues to reduce corporate income taxes would pass a cost–benefit test by a significant margin.
Read the full policy brief:
* * * * * * * *Resources for the Future (RFF) is an independent, nonpartisan organization based in Washington, DC, that conducts rigorous economic research and analysis to improve environmental and natural resource policy.