Files
Abstract
The goal of this paper is to contribute the proper design of a set of energy-environmental policies where the use of fossil fuels generates multiple externalities. We develop a computable general equilibrium (CGE) model for the United States with an explicit treatment of energy substitution, physical energy use and corresponding emissions of greenhouse gases and local air pollutants, as well as a wide range of different effects caused by these emissions. Our simulation scenarios are designed to illustrate how ignorance of jointly optimal policies affects the overall welfare, energy use, environmental consequences, and economic activities. Specifically, three scenarios on energy taxes, including taxing greenhouse gases alone, taxing local air pollutants alone, and joint implementation of the above two taxes, are analyzed. Our numerical results are consistent with the optimal policy rule of “full social costs pricing of energy”: the United States can achieve a higher welfare gain along with lower fuel use and pollution emissions in the scenario where joint taxes on greenhouse gases and local air pollutants are adopted. The estimated overall welfare gains are $12,308 million, where welfare gains of reductions in climate change damage and in adverse health effects make substantial contributions. With respect to the welfare gains from the reductions in the adverse health effects, the monetary health benefits estimates are dominated by the reductions in acute mortality and the chronic bronchitis effects, which represent about 98 percent of the total monetary health benefits.