Economists have widely considered carbon taxes to be the most cost-effective way to reduce greenhouse gases—but some stakeholders, including the Trump administration, point to concerns about the economic impacts of such policies.
But is that a valid fear? Not according to a new Resources for the Future (RFF) working paper by researchers Gilbert Metcalf and James Stock. Based on analysis of 31 European countries, the researchers find that carbon taxes have no adverse effects on GDP growth or total employment growth rates.
All 31 countries included in the study implement cap-and-trade policies through the European Union (EU) Emissions Trading System, and 16 implement a carbon tax as well. By identifying and comparing the impact of these carbon taxes on emissions, output, and employment, this study paints a picture of carbon tax impacts that can translate broadly to US policies.
“Because different European countries adopted carbon taxes at different times and with different degrees of ambition, and many have subsequently changed their tax rates, the European data provide a great platform to assess the impact of a carbon tax on the economy,” Stock says.
Among the top findings:
- For a wide range of carbon tax specifications, there is no evidence of adverse effects on GDP growth or total employment.
- Carbon taxes appear to have no long run effect on growth rates.
- A broad-based US carbon tax would likely cause greater emissions reductions than the carbon taxes in EU countries, as it would apply to industry sectors that, in the EU, are covered by the EU Emissions Trading System.
- A $40-per-ton carbon tax covering 30 percent of emissions reduces emissions by roughly 4 to 6 percent. Because a US carbon tax would apply to more industry sectors than in the EU, this range would likely be the lower bound for emissions reductions for a US policy.
“Opponents have long argued that a US carbon tax would hurt economic growth and be a job killer,” says Metcalf. “Our analysis of European carbon taxes finds no support for that claim.”
To learn more about these findings, read the working paper, “The Macroeconomic Impact of Europe’s Carbon Taxes,” by RFF University Fellows Gilbert Metcalf (Tufts University) and James Stock (Harvard University).
Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.
Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.