Understanding Economic Support For Carbon Fee & Dividend Policies
More than 3,500 economists, including many of the most preeminent, have endorsed addressing climate change with a gradually rising price on carbon in which all funds are returned to households. Second, the economic cost of not addressing climate change has never been more apparent to the U.S. populace, raising the urgency for policy that will reduce these expensive damages. However, as the peer reviewed economic literature starts modeling H.R. 763 specifically, we will incorporate those findings into how we evidence that a revenue neutral carbon tax ("RNCT") is "Good for the Economy".
Specifically, economists assert that a carbon fee corrects a market failure that leads to poor (suboptimal) resource allocation. Just as a cigarette tax yields less smoking and less expenditures for treating the related diseases (e.g., lung cancer and emphysema), a carbon tax yields less fossil fuel emissions and less expenditure on related health issues and the cleanup and recovery from climate damages caused by wildfires, floods, hurricanes, sea level rise, etc.
Peer Reviewed Literature
That a revenue neutral carbon tax such as the Energy Innovation Act (HR 763) improves the economy and society is generally evidenced through cost/benefit analysis. The peer reviewed literature indicates that the policy benefits of improved health and reduced climate damages are roughly four to ten times the costs of the policy which stem from a shift toward slightly higher cost energy sources.
According to the peer reviewed economic literature, what happens to GDP under a revenue neutral carbon tax? As with a cigarette tax, the impact is minimal, but largely depends on what is done with the revenue raised. Generally, model estimates will show a slight decline, but these estimates do not include the climate, health, or other benefits of the policy. Models are being developed that include these benefits and will show much more positive results. See the "Resources" tab for additional information and studies.
Important new research by a team led by Dr. Noah Kaufman highlights what carbon prices are needed to drive U.S. carbon emissions down to net zero by mid-century. This Columbia study was published in a top journal and looked at target years of 2040, 2050 or 2060. Though it is only from one model, it is important for our advocacy because the U.S. price path required to achieve net-zero by 2050 aligns perfectly with the Energy Innovation Act’s base price path, which starts at $15/ton and increases $10/ton each year thereafter. In addition, the paper discusses and quantifies the key sources of uncertainty in these estimates, providing climate advocates with a clear understanding of the key factors that would cause emission reductions to be more or less than estimated.
The paper begins by suggesting a U.S. carbon price path might best be established by having policymakers first set the emissions objective they want to achieve, then climate economists could estimate what price path would likely achieve that objective. The paper then presents results from three potential emission objectives: net-zero CO2 emissions by 2040, 2050 or 2060 (see left panel of chart, below). The range of U.S. carbon prices estimated to achieve each objective are shown at two points in time: 2025 and 2030 (right panel). Prices after 2030 would be determined at a later date with the benefit of having seen the emission reductions generated from the carbon prices up to that point.
The target year of most interest to CCL is 2050, as the Energy Innovation Act (1) and other important climate policy proposals state emissions targets anchored to this year. The estimated price range required to meet the net-zero 2050 objective is $34 to $64/ton in 2025 and $77 to $124/ton in 2030 (see blue bar in the graph). If the Energy Innovation Act carbon price began in 2021, it would reach $55/ton in 2025 and $105/ton in 2030, and these are right in the middle of the range of necessary prices. According to this very credible estimate, the Energy Innovation Act’s baseline carbon price path is well designed to achieve our science-based emission reduction target.
The article then discusses and quantifies the key sources of uncertainty in the modeling process that determine where, within the estimated range, the actual carbon price will need to fall to meet the objective. In other words, they give us an idea of where the model is most likely to be wrong, and by how much (see graphic below). Three sources warrant discussion. First, the model must assume what oil, natural gas and other energy prices will be going forward (assuming no carbon price). If the model is wrong, and oil prices are lower than expected, baseline emissions will be higher, and the carbon price will need to be about $25 higher in 2030 (top black horizontal bar in the graph, below) to achieve the net-zero by 2050 objective. In contrast, higher-than-expected oil and gas prices will mean the carbon price can be about $20 lower (second black bar).
A real wildcard is the level of innovation. A leading study (see page 9) on U.S. carbon tax modeling makes clear that “a carbon tax may spur innovation by increasing incentives for research and development on low-carbon or energy-efficient technologies relative to the reference case. Indeed, that may be one of its most important outcomes.” Modelers generally expect this effect to yield greater emission reductions than estimated by the model and, if this transpires, the carbon price can be lower.
Finally, a level of policies that complement emission reductions, such as “air quality regulations that lead to higher coal retirements, more aggressive energy efficiency measures and more aggressive early-stage deployment support for certain low-carbon technologies” (page 3 of the paper), are assumed in the model. If they are strengthened, the carbon price may be $10-$20 lower and, if they are weakened, $10-$20 higher.
These important results are very supportive of CCL’s advocacy and useful for our volunteers! They show that the Energy Innovation Act is well designed to achieve the science-based reduction targets we are committed to. They also make clear that there is uncertainty in the estimates, what its primary sources are, and how material each is. This is a powerful study in support of strong climate action: run with it, advocates!
Big benefits at zero economic cost
The first study comes from economists at Harvard and Tufts Universities, and is published in the U.S.’s top economic journal. It utilizes a new dataset from the World Bank that shows the impact actual carbon pricing policies have had on jobs and GDP in 31 European countries over the last three decades.
This study is unique and important for two reasons. First, the prior analyses we have relied on, from Columbia, RFF and others, modeled the impact of a carbon tax with the use of significant assumptions that allow them to forecast the economy forward in policy (i.e., with the carbon tax) and no-policy scenarios to discern what impact the policy would have. The new study does not require these assumptions: it looks back over the last 30 years at the policies that have been in place to ascertain their actual impact (vs. projected) on jobs and GDP. Second, the prior analyses could not accurately forecast the impact on jobs, so did not provide such estimates, but this new study is able to estimate what the actual impact on jobs was for the 31 countries over the 30-year period.
The study’s results pertaining to the impact on GDP (see chart, below) are a bit more positive than that from the prior analyses. The carbon tax policies already in effect had a slight positive impact on GDP growth, whereas the prior analyses forecasted a neutral to slightly negative impact. This result is consistent with the summary statement provided by economist Noah Kaufman to Congress last year when he stated studies suggest carbon tax policies have “roughly zero impacts on the overall growth of the U.S. economy.” Remember, these models do not include the value of the climate and health benefits from the policy.
In other words, 30 years of evidence from a carbon tax in Europe confirms what model forecasts have indicated: enormous climate and health benefits would accrue to the U.S. from a policy like the Energy Innovation Act and Carbon Dividend Act, and those benefits would come at roughly zero cost to the economy. Given these benefits are valued at over $800 billion per year (Footnote 2), our policy would clearly be of tremendous net benefit to the country.
A typical impulse response function for the impact on the annual rate of growth of GDP in response to a permanent $40 increase in a carbon tax, estimated using a structural vector autoregression. The white dotted line indicates the point estimate, and the two shaded areas indicate 67 percent and 95 percent confidence bands. From Metcalf and Stock, 2020, RFF.
The results on jobs (see chart, below) are positive as well. The European carbon tax policies caused employment to shift away from industries that pollute more, and toward the emerging clean energy economy. Initially, more jobs are created than lost, though this net job growth fades over time. (Results should be stronger under a policy where all funds are returned to households.)
This experience with job growth is consistent with (see page 7) results from British Columbia’s carbon tax. These results are important for our advocacy because actual experience in Europe over 30 years makes clear that carbon tax policies in practice have been positive for jobs. The evidence is clear that these policies are not “job killers.”
A typical impulse response function for impact on the annual rate of growth of employment in response to a permanent $40 increase in a carbon tax, estimated using a structural vector autoregression. The white dotted line indicates the point estimate, and the two shaded areas indicate 67 percent and 95 percent confidence bands. From Metcalf and Stock, 2020, RFF.
A boost to clean energy jobs
The second study evaluates the quality of clean energy jobs in the U.S. by comparing the wages and benefits of these jobs—clean energy generation (footnote 3) energy efficiency, clean grid and storage, clean fuels, and clean vehicles—to the national average as well as to those in the fossil fuel industry. The summary results are as follows:
- Median hourly wages for clean energy jobs are 25% higher than the national median wage. Further, clean energy jobs are more likely to come with health and retirement benefits than the rest of the private sector. And generally, unionization rates for clean energy jobs are slightly higher than the rest of the private sector.
- Clean energy job salaries are comparable to fossil fuel job salaries. For instance, jobs in coal, natural gas and petroleum fuels pay about $24.37 an hour, while jobs in solar and wind pay about $24.85 an hour. Similarly, jobs in energy efficiency come with median salaries of about $24.44.
- Even without a charge for pollution, U.S. clean energy employment has grown 6.0%, more than twice the national average, for the last three years (2017-2019). In contrast, employment has fallen in the natural gas (-5.3%) and coal (-7.1%) businesses.
This information is important for our advocacy because the creation of good quality jobs is of critical importance to our country, especially now. Economic analysis makes clear that a carbon tax will shift jobs to the clean energy economy, and this analysis provides strong evidence that these new jobs will provide good wages and benefits that are well in excess of the national average and on par with those they are replacing.
The next Congress will present a critical opportunity for climate advocacy. Carbon tax policies will be introduced into Congress, and some opponents of these policies may trumpet that they are “a job killer” or will harm the economy. It’s happened before. At CCL, we are crystal clear that the peer-reviewed literature indicates such policies would have minimal impact on GDP while providing tremendous health and climate benefits, and that the policies will create abundant, high quality jobs.
- The Energy Innovation Act mandates 90% reductions of all net greenhouse gas emissions by that time (i.e., Methane, NOx, and others). Achieving net-zero CO2 emissions would mean slightly exceeding the bill’s target. Specifically, based on the bill’s reference year of 2015, achieving net-zero CO2 emissions, a reduction of 5411 MMT, would exceed our target of 90% of total net greenhouse gas emissions or 5244 MMT (90% of 5827).
- The value of the climate benefits from our policy are being updated in early 2021. The health benefits have been valued at $700 billion a year.
- This excludes nuclear.
Introduction and Agenda
Carbon Prices Yield Net-Zero by 2050
Policy Costs vs. Policy Benefits
Widespread Economic Support
- Jerry Hinkle
To skip ahead to a specific section go to the time indicated in parenthesis.
Introduction and Agenda
Carbon Prices Yield Net-Zero by 2050
Policy Costs vs. Policy Benefits
Widespread Economic Support
- Jerry Hinkle
- Climate Leadership Council: Economists Statement of Support
- CCL Blog: Is this carbon price enough? Here’s what the experts say - Jerry Hinkle, CCL Economics Policy Network
- Columbia Center of Global Energy Policy: Net Zero Carbon Prices Two Page Summary PDF
- CCL's Research Team: 2019 Ways & Means Submitted Testimony
- Shindell, D.T. Climate and Health Impacts of US Emissions Reductions Consistent with 2 °C, Nature Climate Change, Feb 2016
- Ricke, K. et al. Country-Level Social Cost of Carbon, Nature Climate Change, Sep 24, 2018
- Goulder, L. & Hafstead, M. (2017) Confronting the Climate Challenge: US Policy Options, Resources for the Future