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Faculty of Economics

Now that the United States has announced it plans to rejoin the Paris climate accord, University of Cambridge academics have examined what this means for the US economy and how it compares with other countries. They suggest a carbon tax of 32.3% is needed for US to achieve its original Paris pledge and it causes a drop in GDP of at most 0.6%.

 

Dr Tiago Cavalcanti

“The United States decision to return to the Paris Climate Change Agreement provides an important boost to global efforts to address climate change collectively,” says Dr Tiago Cavalcanti. “That’s why, it is important to evaluate its economic implications, if any.”

Tiago Cavalcanti, and Zeina Hasna from the Faculty of Economics at the University of Cambridge and Cezar Santos from Banco de Portugal, have looked at the change in GDP and labor allocation resulting from signing up to the Paris Accord, in their new working paper Climate Change Mitigation Policies: Aggregate and Distributional Effects.

Dr Tiago Cavalcanti says "The economic effects of climate change mitigation policies have been at the centre of policy debate for many years. Now that the US has rejoined the Paris Accord, it is important to investigate what achieving the Paris target actually means for the US economy and how these economic effects compare across and within countries.”

In 2015, close to 200 nations agreed to jointly tackle global warming through a legally binding international treaty, the Paris Accord. The international effort aims to cut emissions by 2030. Parties to the deal agreed to keep global warming to less than 2degrees above pre-industrial levels. The US, which is the world's second-largest emitter of greenhouse gases, withdrew from the Paris deal under the former Trump administration and rejoined on 20 January 2021.

US GDP drop following Paris Accord is at most 0.6%

Zeina Hasna, a PhD student adds: “In our paper, we estimate the carbon tax needed for the US to achieve its original Paris pledge of 26% emission reduction and investigate its aggregate and distributional effects on the US economy. We then apply the same climate policy to five other emerging and advanced economies: Brazil, Canada, China, India and Mexico to capture distributional effects across countries."

Their research indicates that for the United States to achieve its original Paris Agreement goal, a carbon tax of 32.3% is needed and it causes a drop in GDP of at most 0.6%. Applying the same carbon tax to other countries in their sample (Brazil, Canada, China, India and Mexico) yields drops in output ranging from 0.5% (Brazil) to 2.1% (China).

Dr Cavalcanti adds “The difference between countries is due to varying degrees of importance of the taxed energy sectors in the respective economies in terms of value added, along with intermediate consumption and labor force shares. Nevertheless, these adverse effects on GDP can be partially or entirely offset through tax rebates.”

The research has found that the so-called ‘dirty’ energy sectors exposed to the carbon tax witness the largest drop in wages, and consequently the largest labor outflow. “However, by examining the skill distribution, we find that less-talented workers in dirty energy production reallocate away from the taxed sectors into other sectors in the economy, while workers with a comparative advantage in dirty energy production remain and end up bearing most of the cost from the drop in wages,” he adds. “These workers, however, constitute a small fraction of total employment.”

The full paper is available at:
http://www.econ.cam.ac.uk/research/cwpe-abstracts?cwpe=20117

 

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Climate Change

US

Policy

GDP

US Economy

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