A New Vision for the US Climate Agenda
IMF Blog, March 10, 2021
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- Authors: Ian Parry
- Published: March 10, 2021
Overview
- Over the next decade, global greenhouse gas emissions need to be cut by 25– 50 percent to be on track for meeting the 2015 Paris Agreement goal of containing global warming to 1.5–2°C.
- The United States intends to achieve carbon neutrality by 2050, with a 2030 emissions target to be announced shortly.
- The US climate plan envisions stronger energy efficiency standards, clean technology subsidies, and $2 trillion of public funding over ten years for clean energy infrastructure and critical technologies, such as green hydrogen.
- The US will need to act decisively to help deliver the global emissions reductions needed over the next decade.
The case for carbon pricing
- A nationwide carbon charge (for instance, a carbon tax) would:
- Increase the price of carbon-intensive fuels and electricity, incentivizing reduced energy use and shifts toward cleaner fuels across all sectors.
- Spur clean technology investments.
- Mobilize revenue, reduce deaths from local air pollution, and be straightforward to administer.
- Be integrated into federal gasoline and diesel taxes and extended to coal, natural gas, and other petroleum products.
- Quantitative illustrations:
- A carbon tax rising to $50 per ton by 2030 would cut US carbon dioxide emissions 22 percent.
- Such a tax would raise revenue by about 0.7 percent of GDP per year.
- International momentum and political constraints:
- Emissions trading schemes have recently emerged in China, Korea, and Germany.
- Canada is raising its carbon price to $135 by 2030.
- Nine carbon tax bills since 2018 have failed to make progress in Congress.
- Distributional and price impacts:
- A $50 carbon tax would increase the future price of gasoline, electricity, and natural gas by 15, 40, and 100 percent respectively.
- The initial burden would be regressive: it would amount to 1.6 percent of consumption for people in the bottom fifth of incomes, but only 0.9 percent for those in the top fifth.
- Compensating those with incomes in the bottom 40 percent would require only 25 percent of the revenue; the remainder could be used for clean infrastructure spending or cuts in taxes on employment.
- Border carbon adjustment:
- The plan proposes a border carbon adjustment to surcharge certain emissions-intensive imports from countries without an equivalent carbon price and to refund US-made exports to such countries.
- The European Union is moving ahead with this mechanism; other countries are considering it.
- A US border carbon adjustment could preserve competitiveness for steel, aluminum, and other energy-intensive producers until international coordination on carbon pricing occurs.
- Transition considerations:
- The clean energy transition will create opportunities in technology and renewable energy and negatively affect some existing industries, requiring measures to assist vulnerable workers and regions.
Reinforcing incentives at the sectoral level
- Where carbon pricing is constrained, complementary instruments are needed.
- Feebates:
- Impose a fee on high-emission products/activities and provide rebates to low-emission counterparts.
- Example for transportation: tax on new vehicles = (carbon price) × (vehicle’s emissions per mile − fleet average) × (average lifetime mileage).
- A feebate with a shadow price of $200 per ton of carbon dioxide would:
- Provide a subsidy of $5,000 for electric vehicles.
- Impose a surcharge of $1,200 for a vehicle with fuel economy of 30 mpg.
- Subsidies for clean vehicles would decline and taxes for high-emission cars would rise as the fleet average emissions decline.
- Analogous feebate schemes could be applied to power generation, industry, buildings, forestry, and agriculture.
- Comparative attributes:
- Feebates avoid a large increase in energy prices (no pass through of carbon tax revenues into higher energy prices).
- Unlike higher fuel taxes, feebates do not encourage people to drive less.
- Feebates tend to be more flexible and cost effective than regulations and, unlike clean technology subsidies, avoid a fiscal cost.
International coordination is key
- Scaling up mitigation ambition among large emitters is central to the US plan.
- International coordination can:
- Provide reassurance on competitiveness concerns and reduce the risk of countries reneging on mitigation commitments.
- Proposed mechanism:
- An international carbon price floor among large emitting countries, with design options for equity:
- Stricter requirements for advanced economies.
- Assistance for lower-income economies.
- Flexible application to accommodate alternative approaches with equivalent emission impacts where pricing is difficult.
- The United States, as the world’s second largest emitter, needs to act decisively and adopt novel approaches to advance the climate agenda on all fronts.
Ian Parry — March 10, 2021