Results from two recent analyses suggest that implementing a carbon tax has no discernible detrimental effects on employment and GDP growth.
Economists broadly agree that placing a price on carbon, whether through a cap-and-trade program or a tax, is a key element of an economically efficient suite of policies to reduce greenhouse gas emissions. In the current US Congress, numerous bills propose the establishment of national carbon tax systems, along with a few that push for cap-and-trade programs. These bills reflect a growing consensus that action is needed at the national level to curb carbon pollution in the United States and that a carbon tax is the most straightforward way to do that. The bills also reflect the existing consensus among economists, as typified by the more than 3,500 economists (including us) who signed the Climate Leadership Council’s statement published in the Wall Street Journal last year, which calls for a carbon tax as “the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary.”
However, a major stumbling block to pricing carbon pollution is concern over the macroeconomic impacts of the policy. The Trump administration’s retreat from national climate policy reflects a belief that ambitious climate action could have detrimental consequences for economic growth and employment. While initiating a process to withdraw the United States from the global Paris Agreement, for example, the president claimed that the cost to the economy would be “close to $3 trillion in lost GDP and 6.5 million industrial jobs.”
How should we assess the economic costs of a carbon tax? Until recently, most analyses have been based on large-scale computable general equilibrium models. One of these models, the Goulder-Hafstead E3 model, is the engine behind one of Resources for the Future’s digital data tools, the Carbon Pricing Calculator. Today, we have enough experience with carbon tax systems around the world to carry out statistical analyses of existing carbon taxes: with the first carbon tax implemented in 1990, we can draw from up to three decades of data.
Directly examining the empirical evidence has two virtues. First, estimating the real-world effects of carbon taxes on GDP, employment, and emissions reductions speaks directly to concerns that carbon taxes kill jobs. Second, the empirical estimates provide a check on the calibrated theoretical models.
Continue reading the report briefing on the Resources for the Future (RFF) website.
A version of this article appeared in print in the October 2020 issue of Resources.
Download the report “The Macroeconomic Impact of Europe’s Carbon Taxes” here.