Exploring the impacts of a national U.S. CO₂ tax and revenue recycling options with a coupled electricity-economy model

Journal Article · Thu Feb 01 00:00:00 EST 2018 · Climate Change Economics

DOI:https://doi.org/10.1142/S2010007818400158· OSTI ID:1431047

Caron, Justin ^[1]; Cohen, Stuart M ^[2]; Brown, Maxwell ^[2]; Reilly, John M. ^[3]

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1. Massachusetts Inst. of Technology (MIT), Cambridge, MA (United States); HEC Montreal, QC (Canada)
2. National Renewable Energy Lab. (NREL), Golden, CO (United States)
3. Massachusetts Inst. of Technology (MIT), Cambridge, MA (United States)

This paper provides a comprehensive exploration of the impacts of economy-wide CO₂ taxes in the U.S. simulated using a detailed electric sector model [the National Renewable Energy Laboratory's Regional Energy Deployment System (ReEDS)] linked with a computable general equilibrium model of the U.S. economy [the Massachusetts Institute of Technology's U.S. Regional Energy Policy (USREP) model]. We implement various tax trajectories and options for using the revenue collected by the tax and describe their impact on household welfare and its distribution across income levels. Overall, we find that our top-down/bottom-up models affects estimates of the distribution and cost of emission reductions as well as the amount of revenue collected, but that these are mostly insensitive to the way the revenue is recycled. We find that substantial abatement opportunities through fuel switching and renewable penetration in the electricity sector allow the economy to accommodate extensive emissions reductions at relatively low cost. While welfare impacts are largely determined by the choice of revenue recycling scheme, all tax levels and schemes provide net benefits when accounting for the avoided global climate change benefits of emission reductions. Recycling revenue through capital income tax rebates is more efficient than labor income tax rebates or uniform transfers to households. While capital tax rebates substantially reduce the overall costs of emission abatement, they profit high income households the most and are regressive. We more generally identify a clear trade-off between equity and efficiency across the various recycling options. However, we show through a set of hybrid recycling schemes that it is possible to limit inequalities in impacts, particularly those on the lowest income households, at relatively little incremental cost.

• Research Organization: National Renewable Energy Laboratory (NREL), Golden, CO (United States)
• Sponsoring Organization: USDOE Office of International Affairs (IA), Climate Change Policy and Technology (IA-40)
• Grant/Contract Number: AC36-08GO28308
• OSTI ID: 1431047
• Report Number(s): NREL/JA--6A20-70282
• Journal Information: Climate Change Economics, Journal Name: Climate Change Economics Journal Issue: 01 Vol. 09; ISSN 2010-0078
• Publisher: World Scientific
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
CO2 tax
carbon tax
climate policy
distributional impacts
double-dividends
equity
household welfare
model coupling
progressivity
top-down/bottom-up coupling