The Macro Effects of Climate Policy Uncertainty

Abstract

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. Email: [email protected], [email protected], [email protected]. The views expressed in this paper are our own and do not reflect the views of the Federal Reserve System or its staff. For helpful comments we thank seminar and conference participants at SED, the San Francisco Fed Conference on Climate Change, the Federal Reserve Energy System Meeting, Midwest Macro, ASSAs, Berkeley Climate Economics Workshop, UCSB, Harvard, and Universidad del Rosario. All potential errors are our own.