The Economic Consequences of Delay in US Climate Policy

The United States Environmental Protection Agency (EPA) has begun regulating existing stationary sources of greenhouse gases (GHG) using its authority under the Clean Air Act (the Act). The regulatory process under the Act is long and involved and raises the prospect that significant U.S. action might be delayed for years. This paper examines the economic implications of such a delay. We analyze four policy scenarios using an economic model of the U.S. economy embedded within a broader model of the world economy. The first scenario imposes an economy-wide carbon tax that starts immediately at $15 and rises annually at 4 percent over inflation. The second two scenarios impose different (and generally higher) carbon tax trajectories that achieve the same cumulative emissions reduction as the first scenario over a period of 24 years, but that start after an eight year delay. All three of these policies use the carbon tax revenue to reduce the federal budget deficit. The fourth policy imposes the same carbon tax as the first scenario but uses the revenue to reduce the tax rate on capital income. We find that by nearly every measure, the delayed policies produce worse economic outcomes than the more modest policy implemented now, while achieving no better environmental benefits.