Input-Output Model Analysis: Pricing Carbon Dioxide Emissions: Working Paper 2010-04

Working Paper
June 18, 2010

By Kevin Perese

The risk of significant climate change caused by greenhouse gas emissions is currently one of the largest environmental and economic issues facing policymakers in the United States and around the world. Carbon dioxide (CO2) is one of the most prevalent greenhouse gases released into the atmosphere, so some policymakers have placed their focus on reducing these emissions. Economists generally agree that efficient regulation of CO2 emissions involves placing a price on them. An input–output (IO) model of the U.S. economy provides a framework that can be used to estimate detailed commodity price effects in response to a placing price on the emission of CO2 into the atmosphere.

This paper provides a general overview of IO models and a specific application of an IO model to estimate the effect of a $20 tax per metric ton of CO2 emissions. In comparison with previous work by other analysts using an IO model for this type of analysis, the model presented here uses more recent (though less detailed) data, holds the price of most imported commodities fixed while subjecting imported petroleum, natural gas, and coal to the tax, and makes adjustments for the noncombusted uses of fossil fuels.

Results from the model, which can only be interpreted as the first-order effects of the policy, imply that in response to a $20 tax on CO2 emissions, energy commodities such as natural gas, electricity, and gasoline will experience price increases of approximately 10%, but the vast majority of commodities will experience much smaller price increases of approximately 1%. The distribution of the policy effects across sectors of the economy are based on the relative price increases and the mix of commodities consumed in each sector. Based on the estimated price increases and the mix of commodity consumption observed in the 2006 input–output tables, consumers would bear approximately 70% of the aggregate policy effects; federal, state, and local governments would bear about 12% of the aggregate policy effects; and private fixed investment costs would be approximately 8% higher.