As part of RFF’s Carbon Pricing Initiative, RFF experts aim to inform the design of carbon pricing policies by examining the impacts of carbon pricing proposals and to help leaders better understand the fiscal and environmental costs and benefits of their proposals. Building upon our popular E3 Carbon Tax Calculator, our latest Carbon Pricing Calculator is a new interactive tool that helps users visualize the environmental and economic effects of different policy designs, including both existing designs and custom user-built policies.
How to Use the Carbon Pricing Calculator
Our Carbon Pricing Calculator allows users to compare the environmental and economic impacts of current legislative proposals (updated as of September 2019) that place a price on carbon, as well as a custom user-specified carbon tax path.
The measurement dropdown allows users to select a dimension of impact to consider: annual emissions, annual revenues, carbon price, cumulative emissions, percentage change to consumer prices by 2030, GDP, or the change in the average household’s wealth in the first year of the policy by household income (in quintiles). Annual and cumulative emissions refer specifically to energy-related carbon dioxide emissions.
The custom carbon pricing design section of the tool allows users to specify their own carbon tax path. The custom design data series displays once a user has selected an Initial Tax Per Metric Ton, Tax Growth Rate, and method of Revenue Recycling.
The data series section allows the user to toggle on and off existing policy designs to display in the tool. By default, no existing policy designs display; these can be viewed by clicking on a policy name. The business as usual data series, which is displayed by default, shows the Energy Information Administration’s (EIA) 2019 Annual Energy Outlook (AEO) reference case, which assumes current laws and regulations affecting the energy sector are unchanged throughout the projection period, and thus that no federal US carbon pricing policy is in place.
In the top right corner of the tool, users can toggle between chart and table view and download the images or data. See the Sharing Our Work section below for important information about sharing any information from this calculator.
About the E3 Model
To evaluate the impact of carbon pricing policies, we utilize the Goulder-Hafstead Energy-Environment-Economy E3 CGE Model, an economy-wide model of the United States with international trade. Production is divided into 35 industries, with particular emphasis on energy-related industries such as crude oil extraction, natural gas extraction, coal mining, electric power (represented by four industries), petroleum refining, and natural gas distribution. The model is unique in its detailed treatment of the tax system, which allows for interactions of environmental policy and pre-existing taxes on capital and labor; and its attention to capital dynamics, which are important for analyzing how policies impact the economy over time. The model utilizes 2013 benchmark data and solves for impacts at one-year intervals beginning in 2013. We use the Energy Information Administration’s (EIA) reference case for emissions and GDP from the 2019 Annual Energy Outlook (AEO), and we derive projections for emissions and GDP under a carbon price scenario by multiplying the percentage change in emissions or GDP from baseline from the E3 model to the AEO baseline emissions. As shown in Chen, Goulder, and Hafstead (2018), under a carbon tax the percentage changes in emissions from business as usual are not highly sensitive to the assumed business-as-usual forecast.
In Confronting the Climate Challenge: US Policy Options, published by Columbia University Press (co-authored by Lawrence Goulder of Stanford University and Marc Hafstead of RFF), the E3 model is used to evaluate carbon taxes, cap-and-trade programs, clean energy standards, and increases in the federal gasoline tax. The model has also been featured in four peer-reviewed journal publications, and it was included in Stanford’s Energy Modeling Forum (EMF) 32: Inter-model Comparison of US Greenhouse Gas Reduction Policy Options.
The distributional impacts of the carbon price in the first year of the policy are derived from the RFF Incidence Model, which uses inputs from the E3 model to determine the average change in household economic welfare by quintile in the first year of policy implementation. The Incidence Model takes estimates of nationwide changes in expenditure and income and uses detailed data on US households to estimate the impacts of those aggregate change on specific household types distinguished by income, geography and demographic information. More information on the RFF incidence model can be found here.
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Key Elements of Carbon Tax Policies in the Calculator
For this analysis, we consider the environmental and economic impacts of carbon prices with the following designs.
- The price is imposed on all fossil fuels (coal, petroleum, and natural gas) combusted within the United States.
- The price is based on the carbon content of these fuels.
- Only the effect of the price on energy-related CO2 emissions is modeled. Emissions from the other five greenhouse gases (methane, nitrous oxide, HFCs, PFCs, and SF6) and non-energy-related CO2 emissions are not included in this analysis.
- The price is applied at a rate of $X per ton (in $2020) of CO2 emitted through combustion, rising at Y percent above inflation. The price is initially imposed in 2020 (or 2021 in the case of the SWAP Act). (Under the Healthy Climate and Family Security Act, we find the carbon price consistent with the emissions cap with banking and borrowing of allowances permitted.)
- Border adjustments are only considered in the model for imports and exports of secondary fossil fuels (such as gasoline).
Note: Some legislative policies included in the calculator do tax non-energy-related CO2 or non-CO2 greenhouse gases, all of the legislative policies include some form of border adjustments for energy-intensive products, and some of the policies include changes to existing regulations. At this time, the model does not include the effects of taxing non-energy-related CO2 or non-CO2 greenhouse gases or border adjustments or changes in existing regulations. See our Year of the Carbon Pricing Proposal blog post for more details on each bill.
Projections are not forecasts because they depend on values for a number of variables whose future values are uncertain. Thus, they should not be regarded as firm predictions of what actually will occur. Projections in the E3 model represent central estimates of future outcomes conditional on a large number of parameter and model assumptions. Changes to any single assumption may alter projections. Key sources of uncertainty include both baseline forecasts and price elasticities. Chen, Hafstead, and Goulder (2018), available for free download here, evaluate the sensitivity of E3’s projected emissions to baseline forecasts such as fossil fuel prices, economic growth and the rate of energy efficiency improvements in non-energy sectors. In future work, we plan to evaluate the sensitivity of emissions to price elasticities to determine appropriate confidence intervals for long-run emissions projections. Estimates are also subject to change based on updates to models or data.
Sharing Our Work
Our work is available for sharing and adaptation under an Attribution-NonCommercial- NoDerivatives 4.0 International (CC BY-NC-ND 4.0) license. You can copy and redistribute our material in any medium or format; you must give appropriate credit, provide a link to the license, and indicate if changes were made, and you may not apply additional restrictions. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. You may not use the material for commercial purposes. If you remix, transform, or build upon the material, you may not distribute the modified material. For more information, visit https://creativecommons.org/licenses/by-nc-nd/4.0/.
Statement on Nonpartisanship
Please note that as a 501(c)(3) nonprofit organization, RFF does not take positions on specific legislative proposals; nor does RFF directly or indirectly participate in any political campaign on behalf of (or in opposition to) any candidate for elective public office.
For more information about the RFF Carbon Pricing Calculator, please contact RFF fellow Marc Hafstead.