According to recent research published in The Review of Economic Studies by Oxford University Press, carbon taxes will be less efficient at reducing carbon emissions than originally believed. It also discovers that the tax interventions required to meet the goals agreed upon in the 2016 Paris Climate Agreement will need to be greater than anticipated.
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Researchers and policymakers are increasingly interested in using economic policy to eliminate or reduce carbon dioxide emissions. The policy can reduce carbon emissions in a variety of ways, including shifting the economy toward cleaner energy sources and reducing overall energy consumption.
The scientists examined the impact of climate policy on total energy consumption and discovered that policy-induced reductions in energy consumption take considerably longer than predicted by existing models. They argue that advances in energy efficiency technology are an important component of reducing energy consumption but that technological adaptation takes time. The world will not immediately see the benefits of the policy.
To evaluate the impact of climate change mitigation policies on energy use, the investigators created a model of economic growth and energy efficiency with endogenous technical change. They make the point that this model can effectively recreate data-observed patterns of energy use and economic growth. In contrast, the standard model economists use to assess climate policy cannot.
This is largely attributable to the standard model failing to account for the slow pace of technological progress. As a result, the standard model overestimates the cumulative energy use reduction achieved by a given energy tax. They demonstrate that policies created to suit the Paris Agreement target in the standard model fall short by a significant margin in the newer model that takes into account slow-moving technological dynamics. To achieve the target, the newer model necessitates significantly higher taxes.
The investigators also investigated the impact of research and development subsidies aimed at improving energy efficiency. They discover that merging these policies with taxes allows them to meet environmental goals at the lowest possible economic cost. However, these policies alone are ineffective at reducing energy consumption.
Subsidies may result in an initial round of improvements in energy-efficient technologies, but the incentive for subsequent research and development is reduced.
In order to achieve environmental policy goals, taxes on energy will need to be higher than previously thought. This is because the impact of taxes on total energy use happens more slowly than suggested by earlier modeling approaches. I only study one facet of climate policy, and I hope that the results will help improve the next generation of climate-economy models.
Gregory Casey, Study Lead Author, Williams College
Journal Reference:
Casey, G. (2023). Energy Efficiency and Directed Technical Change: Implications for Climate Change Mitigation. The Review of Economic Studies. doi.org/10.1093/restud/rdad001.