The Macroeconomic Impact of Europe's Carbon Taxes
By analyzing carbon taxes in European countries, a new RFF working paper finds that carbon taxes do not harm key economic factors—and could efficiently reduce emissions in the United States.
Policy makers often express concern about the impact of carbon taxes on employment and GDP. Focusing on European countries that have implemented carbon taxes over the past 30 years, we estimate the macroeconomic impacts of these taxes on GDP and employment growth rates for various specifications and samples. Our point estimates suggest a zero to modest positive impact on GDP and total employment growth rates. More importantly, we find no robust evidence of a negative effect of the tax on employment or GDP growth. We examine evidence on whether the positive effects might stem from countries that used the carbon tax revenues to reduce other taxes; while the evidence is consistent with this view, it is inconclusive. We also consider the impact of the taxes on emission reductions and find a cumulative reduction on the order of 4 to 6 percent for a $40/ton CO2 tax covering 30% of emissions. We argue that reductions would likely be greater for a broad-based US carbon tax since European carbon taxes do not include in the tax base those sectors with the lowest marginal costs of carbon pollution abatement.
- 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.
Gilbert E. Metcalf
Gilbert E. Metcalf is a university fellow at RFF. His current research focuses on policy evaluation and design in the area of energy and climate change.
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