A Sustainable Economy: Analysis of a Comprehensive Approach to Climate Change and Energy Policy

With the volatility in crude oil prices of the last few years, the increasing dependence of the U.S. economy on imported crude oil has become more apparent. Carbon emissions in the U.S. have been on the rise since 1990, making the adoptions of the recommendations of the Kyoto Protocol more difficult. Furthermore, there is no long-term policy plan to guide public and business decision makers as to how climate change and energy policy may evolve. Although a consensus is emerging that the U.S. needs to improve energy efficiency and diversify sources of energy supply, suggested policies that would reduce energy consumption and emissions are viewed as having painful economic impacts. This paper describes our study which used the Inforum LIFT model of the U.S. to investigate the economic results of an energy policy which is designed to protect the environment, yet not harm the economy, or result in unfair burdens for affected workers and firms. We incorporate technology and energy efficiency assumptions from the Clean Energy Futures (CEF) study. The policy package examined has these four main components: 1. Market mechanisms to reduce consumption of energy (carbon/energy tax) with the revenues used to stimulate employment by lowering the costs of labor, without decreasing wages. 2. Energy efficiency improvements indicated in the CEF report, including private investment and government spending necessary to achieve these improvements. 3. Border adjustment applied to each industry with a carbon/energy tax burden of 2% or more of the total cost of production. 4. Compensation for lost jobs and community transition assistance. We find that U.S. carbon emissions can be reduced significantly by 2020, with a slight increase in GDP and employment. Oil imports fall significantly. The effect on income distribution is slightly progressive. While the results are conditional on certain energy efficiency assumptions, the assumptions result from technologies that are deemed feasible and not prohibitively expensive. 1. Issues and Goals of Global Climate Change Policy The U.S. is the largest economy and also has a fairly high fossil fuel/GDP ratio, making it the largest energy consuming economy by a wide margin. Since carbon emissions and other greenhouse gases are roughly proportional to fossil fuel consumption, the U.S. is responsible for a large share of total world emissions. While there is some agreement that emissions should be reduced, there is little agreement on how that policy goal should be achieved. A common proposal, that has received a lot of attention, is a carbon or Btu tax. However, there are many who would argue that a carbon tax is unacceptable. Spokesmen for the energy industries, and industries heavily reliant on energy have argued that the economy would suffer as a result of such a tax, and that they would bear the brunt of the suffering. Labor and consumer groups have raised concerns about the effect on employment in the affected industries, and 1 Paper presented at the XIV International Conference on Input-Output Techniques at the University of Quebec in Montreal, Canada, October 10-15, 2002. J. Andrew Hoerner, Center for a Sustainable Economy, http://www.sustainableeconomy.org. James P. Barrett, Democratic staff, Joint Economic Committee (Dr. Barrett was affiliated with the Economic Policy Institute while he worked on this project.); Douglas S. Meade, Inforum, Department of Economics, University of Maryland, College Park, MD 20742, [email protected].