Measuring the Macroeconomic Impact of Carbon Taxes


Metcalf, Gilbert, and James H. Stock. “Measuring the Macroeconomic Impact of Carbon Taxes.” Harvard Environmental Economics Program Discussion Paper Series (2020).
dp_86_metcalf_stock.pdf587 KB


Economists have long argued that a carbon tax is a cost effective way to reduce greenhouse gas emissions. Increasingly, members of Congress agree. In 2019, seven carbon tax bills were filed in Congress (Kaufman et al., 2019). In addition, the Climate Leadership Council has built bipartisan support for a carbon tax and dividend plan (Baker et al., 2017). In contrast, the Trump Administration is retreating from any climate policy and has taken steps to withdraw from the Paris Accord, citing heavy economic costs to the U.S. economy from meeting the U.S. commitments made during the Obama Administration. In his June 1, 2017 statement on the Accord, for example, the President claimed that the cost to the economy would be “close to \$3 trillion in lost GDP and 6.5 million industrial jobs…” (Trump, 2017). What is the basis for claims about the economic impact of a carbon tax? Economic impacts of a carbon tax typically are estimated using computable general equilibrium (CGE) models (as was done for the report on which Trump based his claims). These models, while helpful, make many simplifying assumptions to remain tractable, including optimization, representative agents, and simplified expectations and dynamics, so at a minimum those estimates would ideally be complemented by empirical evidence on the macroeconomic effects of carbon taxes in practice. With carbon taxes in place in twenty-five countries around the world, including some dating to the early 1990s, empirical analysis of historical experience is now possible. This paper considers carbon taxes in Europe to estimate their impact on GDP and employment.

Last updated on 04/13/2020