The economic costs and co-benefits of carbon taxation

Abstract

I examine the general equilibrium costs of climate policies that levy taxes on carbon dioxide (CO2) emissions in the United States and return the revenue in the form of lump-sum rebates and tax relief over the years 2020 to 2040 using the US regional version of the Applied Dynamic Analysis of the Global Economy (ADAGE-US) forward-looking dynamic Computable General Equilibrium (CGE) model. I approximate the value of co-benefits to these policies that arise from concomitant reductions in nongreenhouse gas (GHG) emissions using the CO-Benefits Risk Assessment model (COBRA). There is significant heterogeneity in costs and co-benefits from climate policies across space and income. Policy costs are generally less than 0.5% in equivalent variation terms (between a few tens of dollars and several hundred per household, depending on the income quintile), can be fully neutralized for the lowest-quintile households at a modest increase in overall policy cost, and tend to be lower for upper-quintile households in coastal regions. The policy co-benefit values range widely across regions, approximately $150-1250 per household, exceeding the gross cost of the policy for many households, particularly those in the Midwest. Last, I identify a marginal welfare cost of $58/tCO(2) and a marginal co-benefit of $31/tCO(2) at a national level over all households, which implies a required climate benefit of $27/tCO(2) or less to justify the level of abatement achieved by a $25/tCO(2) tax growing at 5%.