Analyses of U.S. Climate Policy:Examples and Issues

Adele C. Morris, Ph.D.Senior Fellow Policy Director, Climate and Energy Economics ProjectThe Brookings Institution

December 7, 2016

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Economic Analysis GHG Mitigation Policy

• Benefits from avoided climate damages

• Effects on the economy

• Distribution of benefits and costs

• Ancillary costs and benefits

What we do at Brookings

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Overview of this presentation

• Benefits of mitigation as applied in U.S.

• A U.S. carbon tax study with our model: G-Cubed

• Stanford Energy Modeling Forum Project 32: on U.S. carbon tax design

•An illustrative study of President Obama’s Clean Power Plan

How the US Government Monetizes the Benefits of Mitigation

• Interagency Social Cost of Carbon Report

» Applies to regulations of all kinds, from all federal agencies

» Criticized for many good reasons. It’s a hard problem.

» Debate on whether to use domestic or global benefits

*https://www.whitehouse.gov/sites/default/files/omb/inforeg/social_cost_of_carbon_for_ria_2013_update.pdf

Source: US EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990 2014

U.S. Greenhouse Gas Emissions by Gas, 1990–2014

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Illustrative G-Cubed studyIf a U.S. carbon tax were implemented:

» What would be the best use of its revenue?

CARBON TAXES AND U.S. FISCAL REFORM, Warwick J. McKibbin, Adele C. Morris, Peter J. Wilcoxen, and Yiyong Cai

(Used our older 12-sector model)

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Co-Authors on Brookings Modeling Work

Adele C. MorrisSenior Fellow & Policy Director, Climate and Energy Economics Project, Brookings

Warwick J. McKibbinAustralian National University & Brookings Nonresident Senior Fellow

Peter J. WilcoxenSyracuse University & Brookings Nonresident Senior Fellow

ModelDevelopers

G-Cubed Global ModelHandbook of Computable General Equilibrium Modeling,

First Edition, 2013, pp. 995-1068

The G-Cubed model: 9 regions

Number Description

1 United States

2 Japan

3 Australia

4 Western Europe

5 Rest of the OECD, i.e. Canada and New Zealand

6 China

7 Eastern Europe and the former Soviet Union

8 Other Developing Countries

9 Oil Exporting Countries and the Middle East

The G-Cubed model: Industry sectors1 Electricity delivery ElecU

2 Gas utilities GasU

3 Petroleum refining Ref

4 Coal mining CoalEx

5 Crude oil extraction CrOil

6 Natural gas extraction GasEx

7 Other mining Mine

8 Agriculture & forestry Ag

9 Durable goods Dur

10 Nondurables NonD

11 Transportation Trans

12 Services Serv

13 Coal generation Coal

14 Natural gas generation Gas

15 Petroleum generation Oil

16 Nuclear generation Nuclear

17 Wind generation Wind

18 Solar generation Solar

19 Hydroelectric Hydro

20 Other generation Other

Electricitygeneration

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Key features

• Intertemporal optimization with foresight

» But some agents are liquidity-constrained

• Multiple currencies

• Financial capital mobile between regions

• Nominal wages adjust slowly

» Unemployment can occur in the short run

• Exogenous labor supply in the long run

Scenarios:Baseline (no policy) scenario

US carbon tax:4 different uses of revenueStarts at $15 per ton CO2, rising at 4% real annuallyCovers all fossil energy CO2 in the United States

Abbrev. Use of Carbon Tax Revenue

S1_CT/LS Lump sum rebate to households

S2_CT/DR Federal budget deficit reduction

S5_CT/LTR Labor tax reduction

S6_CT/KTR Capital tax reduction

Core scenario

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Emissions decline significantly in all carbon tax scenarios (this is lump sum rebates)

-2.5

-2-1

.5-1

-.5

0

BM

T

2010 2020 2030 2040 2050Year

Simulation S1_CT/LS

Change in Carbon Dioxide Emissions

34% below baseline in 2050

Cumulative reduction:40 billion metric tons

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Revenue from carbon tax is substantial0

10

02

00

30

0

Bill

ion

s o

f D

olla

rs

2010 2020 2030 2040 2050Year

Simulation S1_CT/LS

Tax Revenue

$80B

$310B

$170B

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Sector-level effects

01

02

03

04

0

Per

cen

t C

han

ge

01 02 03 04 05 06 07 08 09 10 11 12

Simulation S1_CT/LS

Changes in Prices in 2030

Producer Domestic Supply

Taxed primary fuels

Exchange rate effect

Domestic price = producer price plus taxSupply price = mix of domestic and import prices

1 Elect.2 Gas3 Ref oil4 Coal5 Crude oil6 Gas ext.7 Mining8 Agri.9 Durables10 Nondur.11 Trans12 Services

-.8

-.6

-.4

-.2

0.2

Per

cen

t o

f B

ase

GD

P

2010 2020 2030 2040 2050Year

Consumption Investment

Government Net Exports

GDP

Simulation S1_CT/LS

Changes in Components of GDP

GDP

Inv.

Consumption

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Scenarios with alternative uses of carbon tax revenue

• S2_CT/DR deficit reduction

» Deficit lower by about 0.15% of GDP annually

• S5_CT/LTR labor tax reduction

» Labor tax rate falls by 0.3 percentage points

• S6_CT/KTR capital tax reduction

» Capital tax rate falls by 2-6 percentage points

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-.5

0.5

11.5

Perc

ent o

f B

ase

GD

P

0 5 10 15 20 25Year

S1_CT/LS S2_CT/DR

S5_CT/LTR S6_CT/KTR

GDP

Different revenue uses produce different GDP outcomes

Capital tax swap

Carbon tax with lump sum rebate, deficit reduction, and

labor tax swap

Baseline

-.5

0.5

1

Per

cen

t o

f B

ase

GD

P

2010 2020 2030 2040 2050Year

S1_CT/LS S2_CT/DR

S5_CT/LTR S6_CT/KTR

Investment

Biggest difference across GDP components is in investment

Capital tax reduction more than offsets effect of carbon tax on investment

Why swap out US corporate income tax?

Hassett and Mathur, February 2011

-.3

-.2

-.1

0.1

.2

Per

cen

t o

f B

ase

GD

P

2010 2020 2030 2040 2050Year

S1_CT/LS S2_CT/DR

S5_CT/LTR S6_CT/KTR

ConsumptionConsumption

Lump Sum is most favorable forconsumption.

Capital tax swap is worst forconsumption.

But notice the scale

Also see differences in employment-.

2-.

10

.1.2

Per

cen

t C

han

ge

2010 2020 2030 2040 2050Year

S1_CT/LS S2_CT/DR

S5_CT/LTR S6_CT/KTR

Changes in Employment

Capital tax swap

… and wages to 2030-1

.5-1

-.5

0.5

1

Per

cen

t C

han

ge

2010 2020 2030 2040 2050Year

S1_CT/LS S2_CT/DR

S5_CT/LTR S6_CT/KTR

Changes in Real Wage

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Conclusion from that study

• Revenue use matters!

• Carbon tax could fund pro-growth US tax reform, depending on design and time frame

» But we know from other studies this would be regressive. So maybe do a combo of benefits to low income households and tax reform.

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Stanford Energy Modeling Forum

• Loose association of CGE and energy modelers

• Do coordinated multi-model exercises to investigate:

» Policies in individual countries

» GHG stabilization scenarios

» Technology and sectoral scenarios

» Which outcomes are robust or sensitive

» Modeling strategies and assumptions

Example Scenario Matrix for U.S. Revenue Recycling Scenarios

U.S. Real Price on All Fossil CO2 emissions

in 2020

Revenue Returned in Lump Sum Rebates to Households

Revenue Decreases Capital Income Tax Rates

Revenue Decreases Labor Income Tax Rates

1/2 Capital Income Tax Rate Decrease, 1/2 Lump Sum Rebates to All Households

(2010$/tCO2) R3.2.x.0 R3.2.x.1 R3.2.x.2 R3.2.x.3

all taxes start in 2020, level out after

2050)R3.2.0.0

BAU (Calibration to AEO 2016 Encouraged)

$25 @5% R3.2.1.0 R3.2.1.1 R3.2.1.2 R3.2.1.3$50 @5% R3.2.2.0 R3.2.2.1 R3.2.2.2 R3.2.2.3$25 @1% R3.2.3.0 R3.2.3.1 R3.2.3.2 R3.2.3.3$50 @1% R3.2.4.0 R3.2.4.1 R3.2.4.2 R3.2.4.3

Solve for initial carbon tax rate and real growth rate so

as to hit 26% reduction target

relative to 2005 in 2025 AND 80 %

reduction target relative to 2005 in

2050

R3.2.7.0 R3.2.7.1 R3.2.7.2 R3.2.7.3

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President Obama’s

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Clean Power Plan• Regulates CO2 from US power sector

• Clean Air Act, Section 111

• 2 years, 4 million comments

• Final rule implementation stayed by Supreme Court

• Likely to be revoked by the Trump Administration

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Clean Power Plan

Goal – Decrease carbon dioxide (CO2) emissions from the power sector by

» ~17% from 2012 levels

» 33% from 2005 levels by 2030.

• Sets state-level limits on emissions rate and mass. States choose goal & implement policies to achieve.

» Rates range widely. For example, in 2025: – Connecticut = 881 lbs CO2/kwh; – Wyoming = 1556 lbs CO2/kwh

EPA analysis of regulation used Integrated Planning Model of U.S. electricity sector.

http://www.trendingenergy.com/epa-releases-final-clean-power-plan/

(Before the stay and election)

EPA’s Clean Power Plan rule addresses the largest category of GHG emissions in the U.S.

About 5,505 MMT CO2 in 2013

Electricity: 2,040 MMT CO2 in 2013

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US Electricity CO2 Emissions: 75% from Coal

Carbon Dioxide from Electricity

Coal

Natural Gas

Petroleum

0

5

10

15

20

25

30

Natural

Gas

Gasoline Coal

Emissions in Kg C/mBTU

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The US INDC: 2025 Emissions Pledge

Center for Climate and Energy Solutions: http://www.c2es.org/docUploads/us-indc-fact-sheet-8-2015.pdf

?

May be subject to repeal

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Conclusion

• Good modeling tools for different US policies and outcomes of interest.

• US federal climate policy outlook was already problematic. Now it is worse.

• Without federal action, action depends on states. US INDC may be dead.

• Good economic potential for a carbon tax in broader tax reform. Political potential???

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Options for further reading:

https://www.epa.gov/sites/production/files/2015-08/documents/cpp-final-rule-ria.pdf

Regulatory Impact Analysis of the Clean Power Plan

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Book

http://www.amazon.com/Implementing-Carbon-Tax-Explorations-Environmental/dp/1138825360/ref=sr_1_1?ie=UTF8&qid=1423668157&sr=8-1&keywords=morris+parry+williams

Book launch was April 22, 2015 at AEI

Policy Brief

http://www.c2es.org/docUploads/carbon-tax-broader-

us-fiscal-reform.pdf

Five carbon tax swap studies: NTJ, March 2015

• CARBON TAXES AND U.S. FISCAL REFORM, Warwick J. McKibbin, Adele C. Morris, Peter J. Wilcoxen, and Yiyong Cai

• CARBON TAXES AND FISCAL REFORM IN THE UNITED STATES, Dale W. Jorgenson, Richard J. Goettle, Mun S. Ho, and Peter J. Wilcoxen

• ENVIRONMENTAL POLICY FOR FISCAL REFORM: CAN A CARBON TAX PLAY A ROLE? Sugandha D. Tuladhar, W. David Montgomery, and Noah Kaufman

• CARBON TAXES, DEFICITS, AND ENERGY POLICY INTERACTIONS, Sebastian Rausch and John Reilly

• THE INITIAL INCIDENCE OF A CARBON TAX ACROSS INCOME GROUPS, Roberton C. Williams III, Hal Gordon, Dallas Burtraw, Jared C. Carbone, and Richard D. Morgenstern

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“11 essential questions for designing a policy to price carbon”

Adele MorrisFriday, July 8, 2016

https://www.brookings.edu/research/11-essential-questions-

for-designing-a-policy-to-price-carbon/