Exploring the Impacts of a National U.S. CO2 Tax and Revenue Recycling Options with a Coupled Electricity-Economy Model

Stuart Cohen, Maxwell Brown, Justin Caron, John Reilly

Research output: Contribution to journalArticlepeer-review

21 Scopus Citations

Abstract

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.

Original languageAmerican English
Article number1840015
Number of pages40
JournalClimate Change Economics
Volume9
Issue number1
DOIs
StatePublished - 1 Feb 2018

Bibliographical note

Publisher Copyright:
© 2018 The Author(s).

NREL Publication Number

  • NREL/JA-6A20-70282

Keywords

  • carbon tax
  • Climate policy
  • CO tax
  • distributional impacts
  • double-dividends
  • equity
  • household welfare
  • model coupling
  • progressivity
  • top-down/bottom-up coupling

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