Discussion Paper

Using a Carbon Tax to Meet US International Climate Pledges

Nov 9, 2016 | Yunguang Chen, Marc Hafstead

Summary

An economy-wide carbon tax is a feasible mechanism to achieve the US 2025 Paris Agreement emissions target. We examine the price level and associated costs of carbon taxes that achieve reductions of 28 percent below 2005 emissions by 2025.

Key Findings

  • The United States will not meet its Paris Agreement pledge for greenhouse gas emissions in 2025 with current policies and previously proposed regulations. An economy-wide carbon tax on those emissions is a feasible policy solution to meet the pledge.
  • A constant revenue-neutral, economy-wide carbon tax of less than $22 per ton of emissions implemented in the year 2017 can meet the 28 percent target with a welfare cost of $34 per ton reduced.
  • Targets can also be met with tax rates that start low and grow over time, but these policies lead to substantially less cumulative emissions reductions between 2017 and 2025.
  • How revenues are used does not impact the level of the price needed to meet the pledge, but it does significantly impact the cost of the policy. Reducing distortionary taxes such as payroll, individual income, and corporate income taxes reduces costs.
  • Delaying the implementation of the economy-wide carbon tax yields higher prices and higher costs with less cumulative emissions reductions.

Abstract

The United States recently ratified the Paris Agreement, under the UN Framework Convention on Climate Change (UNFCCC), in which it pledged to reduce greenhouse gas emissions by 26–28 percent, relative to 2005, by 2025. In the absence of policy efforts beyond those currently in place or already proposed by the Obama administration, the United States would likely fall well short of its promises. However, a federal economy-wide carbon tax on US carbon dioxide emissions could significantly contribute to the additional reductions necessary to fulfill our international climate commitments. Using a detailed multisector computable general equilibrium (CGE) model, we predict the carbon price paths that would be necessary to meet the 28 percent emissions target and show the economic costs of such carbon-pricing policies. We then demonstrate how both the price paths and associated costs change if action is delayed.