In contributing to global climate change mitigation efforts as agreed in Paris in 2015, China has set a target of reducing the carbon dioxide intensity of gross domestic product by 60-65 percent in 2030 compared with 2005 levels. Using a dynamic computable general equilibrium model of China, this study analyzes the economic and greenhouse gas impacts of meeting those targets through carbon pricing. The study finds that the trajectory of carbon prices to achieve the target depends on several factors, including how the carbon price changes over time and how carbon revenue is recycled to the economy. The study finds that carbon pricing that starts at a lower rate and gradually rises until it achieves the intensity target would be more efficient than a carbon price that remains constant over time. Using carbon revenue to cut existing distortionary taxes reduces the impact on the growth of gross domestic product relative to lump-sum redistribution. Recycling carbon revenue through subsidies to renewables and other low-carbon energy sources also can meet the targets, but the impact on the growth of gross domestic product is larger than with the other policies considered.
The effects of a carbon price on U.S. industries are likely to change over time as firms and customers gradually adjust to new prices. The effects will also depend on offsetting policies to compensate losers and the number of countries implementing comparable policies. We examine the effects of a $15/ton CO2 price, including Waxman-Markey-type allocations, on a disaggregated set of industries, over four time horizons—the very-short-, short-, medium-, and long-runs—distinguished by the ability of firms to raise output prices, change their input mix, and reallocate capital. We find that if firms cannot pass on higher costs, the loss in profits in a number of energy-intensive, trade-exposed (EITE) industries will be substantial. When output prices can rise to reflect higher energy costs, the reduction in profits is substantially smaller, and the offsetting policies in H.R. 2454 reduce output and profit losses even more. Over the medium- and long-terms, however, when more adjustments occur, the impact on output is more varied due to general equilibrium effects. We find that the use of the output-based rebates and other allocations in H.R. 2454 can substantially offset the output losses over all four time frames considered. Trade or "competitiveness" effects from the carbon price explain a significant portion of the fall in output for EITE sectors, but in absolute terms, the trade impacts are modest and can be reduced or even reversed with the subsidies. The subsidies are less effective, however, in preventing emissions leakage to countries not adopting carbon policies. Roughly half of U.S. trade-related leakage to non-policy countries can be explained by changes in the volume of trade and the other half by higher emissions intensities induced by lower world fuel prices.
Dale W. Jorgenson, Mun S. Ho, Richard Goettle, and Peter Wilcoxen. 2012. “Energy, the Environment and U.S. Economic Growth.” In Handbook of Computable General Equilibrium Modeling by Peter B. Dixon and Dale W. Jorgenson (eds.). North Holland Publishing Co. Book