Back to OurEnergyLibrary search




The Macroeconomic Effects of a Carbon Tax to Meet the U.S. Paris Agreement Target: The Role of Firm Creation and Technology Adoption

The Macroeconomic Effects of a Carbon Tax to Meet the U.S. Paris Agreement Target: The Role of Firm Creation and Technology Adoption

Full Title: The Macroeconomic Effects of a Carbon Tax to Meet the U.S. Paris Agreement Target: The Role of Firm Creation and Technology Adoption
Author(s): Alan Finkelstein Shapiro, Gilbert Metcalf
Publisher(s): Resources for the Future
Publication Date: May 26, 2021
Full Text: Download Resource
Description (excerpt):

We analyze the quantitative labor market and aggregate effects of a carbon tax in a framework with pollution externalities and equilibrium unemployment. Our model incorporates endogenous labor force participation and two margins of adjustment influenced by carbon taxes: (1) firm creation and (2) green production-technology adoption. A carbon-tax policy that reduces carbon emissions by 35 percent—roughly the emissions reductions that will be required under the Biden Administration’s new commitment under the Paris Agreement—and transfers the tax revenue to households generates mild positive long-run effects on consumption and output; a marginal increase in the unemployment and labor force participation rates; and an expansion in the number and fraction of firms that use green technologies. In the short term, the adjustment to higher carbon taxes is accompanied by gradual gains in output and consumption and a negligible expansion in unemployment. Critically, abstracting from endogenous firm entry and green-technology adoption implies that the same policy has substantial adverse short- and long-term effects on labor income, consumption, and output. Our findings highlight the importance of these margins for a comprehensive assessment of the labor market and aggregate effects of carbon taxes.

All statements and/or propositions in discussion prompts are meant exclusively to stimulate discussion and do not represent the views of OurEnergyPolicy.org, its Partners, Topic Directors or Experts, nor of any individual or organization. Comments by and opinions of Expert participants are their own.

Sign up for our Press Release Distribution List

    Your Name (required)

    Your Email (required)

    Please sign me up to receive press releases from OurEnergyPolicy.org.