The Macro Effects of Climate Policy Uncertainty
50 Pages Posted: 14 Jun 2021 Last revised: 30 Jun 2021
Date Written: March, 2021
Uncertainty surrounding if and when the U.S. government will implement a federal climate policy introduces risk into the decision to invest in capital used in conjunction with fossil fuels. To quantify the macroeconomic impacts of this climate policy risk, we develop a dynamic, general equilibrium model that incorporates beliefs about future climate policy. We find that climate policy risk reduces carbon emissions by causing the capital stock to shrink and become relatively cleaner. Our results reveal, however, that a carbon tax could achieve the same reduction in emissions at less than half the cost.
JEL Classification: H30, Q58, H23
Suggested Citation: Suggested Citation