## Modeling the U.S. Climate Agenda: Macro-Climate Trade-offs and Considerations

_IMF Working Papers, December 10, 2021_

## Source details

**Canonical URL:** [Modeling the U.S. Climate Agenda: Macro-Climate Trade-offs and Considerations](https://www.imf.org/en/publications/wp/issues/2021/12/10/modeling-the-u-s-510377)

## Other formats

- [Markdown version](/en/publications/wp/issues/2021/12/10/modeling-the-u-s-510377/index.md)
- [Structured JSON version](/en/publications/wp/issues/2021/12/10/modeling-the-u-s-510377/index.json)
- [Bundle manifest](/en/publications/wp/issues/2021/12/10/modeling-the-u-s-510377/bundle-manifest.json)

## Bibliographic details
- Authors: Philip Barrett, Katharina Bergant, Jean Chateau, Rui Mano
- Published: December 10, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781557755964.001

---

### Summary
- Context: Run up to the 26th Climate Change Conference and newly unveiled U.S. administration climate targets.
- Purpose: Elaborates on the administration’s plans and uses two IMF-developed models to illustrate macro-climate trade-offs.
- Core conclusions:
  - Subsidies cannot substitute for explicit carbon pricing.
  - Even a moderate carbon tax can greatly economize on the overall fiscal cost of the package.
  - Front-loading decarbonization of the power sector entails only very marginal economic costs but large environmental benefits.
  - Regulations can be effective in the power sector by providing an appropriate shadow cost to carbon, but a carbon tax would be more efficient and easier to administer.
  - Transition away from fossil-fueled power generation will require significant labor reallocation across sectors and locations, needing careful handling to limit social costs.

### Modeling approaches and scenarios
- Model 1: A model with endogenous fuel-specific technological change.
  - Demonstrates that subsidies are not substitutes for explicit carbon pricing.
  - Shows that even a moderate carbon tax greatly economizes on fiscal cost.
- Model 2: A rich sectoral model focused on the power sector.
  - Finds very marginal economic costs from front-loading decarbonization of the power sector.
  - Highlights large accompanying environmental benefits.
  - Indicates that regulations can be effective in the power sector by imposing an implicit shadow carbon cost.
  - Notes that a carbon tax remains the more efficient and easier-to-administer instrument.

### Key findings and trade-offs
- Fiscal and policy trade-offs:
  - Subsidies alone are insufficient to achieve efficient decarbonization.
  - Carbon pricing (even moderate) reduces the overall fiscal burden of climate policy packages.
- Sectoral trade-offs:
  - Power sector: Front-loaded decarbonization yields large environmental gains with only marginal economic costs.
  - Regulation vs. tax: Regulations can mimic a shadow carbon cost in the power sector; carbon tax is preferred for efficiency and ease of administration.
- Labor and distributional considerations:
  - Transition away from fossil-fueled power generation implies significant labor reallocation across sectors and locations.
  - Managing social costs requires careful policy design to handle reallocation.

### Policy implications and recommendations
- Prioritize explicit carbon pricing as a central instrument to economize fiscal cost.
- Use regulations in the power sector cautiously—recognize their potential effectiveness but prefer carbon taxation for efficiency and simpler administration.
- Anticipate and plan for significant labor reallocation:
  - Implement policies to limit social costs associated with transitions across sectors and locations (training, mobility support, targeted assistance).

---

## Content in this bundle

- **Working Paper**
  - [Working Paper (Markdown version)](/-/media/files/publications/wp/2021/english/wpiea2021290-print-pdf.pdf.md){rel="alternate" type="text/markdown"}
  - [Working Paper (PDF)](/-/media/files/publications/wp/2021/english/wpiea2021290-print-pdf.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2021/12/10/modeling-the-u-s-510377_