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Abstract
The United States Environmental Protection Agency (EPA) has begun regulating existing
stationary sources of greenhouse gases (GHG) using its authority under the Clean Air Act
(the Act). The regulatory process under the Act is long and involved and raises the
prospect that significant U.S. action might be delayed for years. This paper examines the
economic implications of such a delay.
We analyze four policy scenarios using an economic model of the U.S. economy
embedded within a broader model of the world economy. The first scenario imposes an
economy-wide carbon tax that starts immediately at $15 and rises annually at 4 percent
over inflation. The second two scenarios impose different (and generally higher) carbon
tax trajectories that achieve the same cumulative emissions reduction as the first scenario
over a period of 24 years, but that start after an eight year delay. All three of these policies
use the carbon tax revenue to reduce the federal budget deficit. The fourth policy imposes
the same carbon tax as the first scenario but uses the revenue to reduce the tax rate on
capital income.
We find that by nearly every measure, the delayed policies produce worse economic
outcomes than the more modest policy implemented now, while achieving no better
environmental benefits.