Tax News Update    Email this document    Print this document  

A new EY QUEST report, "Carbon regulations vs. a carbon tax: A comparison of the macroeconomic impacts," prepared by EY's Quantitative Economics and Statistics (QUEST) group on behalf of the Alliance for Market Solutions, was released on October 18. The report compares the macroeconomic impacts of carbon regulations to a carbon tax that achieves the same reduction in carbon emissions.

The regulations analyzed — Corporate Average Fuel Economy (CAFE) standards, Clean Power Plan (CPP), Renewable Fuel Standards (RFS), and appliance and equipment efficiency standards (AEES) — are estimated to reduce carbon emissions 22% relative to a baseline that includes no carbon emissions policies. The report finds that placing a uniform price on carbon emissions is a less economically costly means to achieve the same 22% reduction in carbon emissions.

Specifically:

1. The existing regulatory approach is estimated to reduce gross domestic product (GDP) in the long-run by, on average, $1,770 per household annually.
2. A revenue-neutral carbon tax could increase GDP in the long-run by, on average, as much as $5,090 per household annually relative to the existing regulatory approach.

A key determinant of the long-run economic impact of a carbon tax is the use of the revenue. This analysis estimates three alternatives:

1. Permanent extension of certain provisions in the Tax Cuts and Jobs Act (TCJA), which produces the largest estimated GDP impact, a 3.2% increase in long-run GDP
2. Investment in public infrastructure, which yields an estimated 2.1% increase in long-run GDP
3. Rebate to households, which results in an estimated 0.7% increase in long-run GDP

The total macroeconomic impact of each policy package computes the combined effect from: (a) removing the existing regulatory approach (the lighter bar in Figure 1), and (b) imposing the carbon tax paired with one of the three specified revenue uses (the darker bar in Figure 1).

Figure 1. Long-run change in annual per-household GDP from emissions-equivalent carbon tax relative to existing regulatory approach, by use of carbon tax proceeds

Note: Economic impacts are scaled to the size of the 2018 US economy. The long-run is defined as when the US economy has fully adjusted to the change in policy. The estimated impacts from an increase in public infrastructure could differ depending on the details of a specific policy proposal but the stylized scenario modeled here assumed an increase in physical capital (e.g., highway spending). The provisions included in the permanent extension of selected TCJA provisions are the expiring individual income tax provisions and expensing of equipment investment. Figures are rounded.

Source: EY analysis.

———————————————

Contact Information For additional information concerning this Alert, please contact:   Quantitative Economics and Statistics Group • Robert Carroll (202) 327-6032 • Brandon Pizzola (202) 327-6864

———————————————
ATTACHMENT

AMS infographic

EY-AMS Reg controls v carbon tax to CO2 abatement