Economic analysis provides strong support for putting a price on greenhouse gas (GHG) emissions as a way of addressing the climate change problem. Many congressional leaders, as well as the Obama administration, support the pricing of GHGs.
One way to establish such a price is through a cap-and-trade program. Another is way is via a carbon tax. The Congress currently is focusing mainly on the former, but there remains considerable interest in the latter as well. Both policies would encourage energy efficiency by inducing supply-side substitutions toward low-carbon fuels as well as demand-side substitutions toward low-carbon goods and services.
The political feasibility of a federal climate policy – whether it’s cap and trade or a carbon tax – depends importantly on whether it can be designed in a way that prevents serious profit losses in the industries that otherwise would suffer significantly under these programs. These are the industries that supply carbon-based fuels and the ones that use such fuels intensively.
This project develops and applies a computable general equilibrium (CGE) model built to assess the impacts of alternative federal climate policies on profits and employment in specific U.S. industries. The model also projects impacts on aggregate economic income, employment, investment, and consumption. The model is distinct from other economy-wide models in recognizing the industry-specificity and dynamics of productive capital. These features are crucial to recognizing how climate policies can create windfalls as well as stranded assets and thereby affect profits. They enable the model to reveal, for example, how the free allocation of emissions allowances can preserve profits by creating economic rents. One of the most hotly debated issues in current climate policy discussions is the extent to which emissions allowances under a cap-and-trade system need to be allocated free in order to preserve profits of various industries. The model’s treatment of capital dynamics enables it to shed light on this issue.
(1) employs the current model to assess policy proposals currently under way. Results are being forwarded to members of congressional committees currently involved in drafting federal climate bills. These include members of the House Energy and Commerce Committee and the Senate Finance and Environment & Public Works committees.
(2) improves the model’s treatment of technological change and longer-run energy supply options (such as carbon capture and sequestration)
(3) conducts econometric work to obtain better estimates of key parameters that determine the technological options and substitution possibilities of producers in various industries
(4) applies the improved model to assess various cap-and-trade and carbon tax policy alternatives (supplementing the work in (1) above)