Carbon tax ‘risk’ already driving down emissions, San Francisco Fed says

Abby Smith

WASHINGTON EXAMINER
Tue, June 22, 2021

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The prospect of a carbon tax being enacted in the next year is already driving companies to make decisions that reduce overall capital and emissions, even before the fee is in place.

“Our findings suggest that the risk of the United States adopting a climate policy in the future causes businesses to shift current investment to less carbon-intensive capital and reduce overall investment,” wrote a group of researchers in a report released Monday by the Federal Reserve Bank of San Francisco.

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“This response leads to lower emissions, even though no actual climate policy is in place,” the researchers add. The report was authored by Stephie Fried, senior economist with the San Francisco Fed; Kevin Novan, associate professor at the University of California, Davis; and William Peterman, chief of the Federal Reserve’s fiscal analysis section in research and statistics.

In their report, the researchers found that a 10% chance of the U.S. government adopting a $45-per-ton carbon tax in the next year prompts one-tenth of the emissions reductions the bank would expect to see if the actual carbon fee was enacted.

Similar to enacting a carbon tax, the risk of such a fee on emissions puts pressure on companies to shift their investments toward cleaner energy and away from carbon-intensive fossil fuels, according to the researchers. Such a risk also leads to a decrease in total capital, which drives down emissions.

In fact, the researchers find that the risk of climate policy drives a larger decrease in total capital and output than the actual enactment of a carbon fee. “This makes climate policy risk a relatively costly way to reduce emissions,” the report notes.

The researchers also note the effects of climate policy risk on business decisions and emissions will grow as the odds that governments will impose climate policy, such as a carbon tax, increase over time.