The concept of placing an economy-wide price on carbon emissions to reduce US carbon dioxide emissions has been gaining attention in recent years. This concept, however, competes with proposals for “regulatory approaches” that do not involve a direct price on carbon but instead rely on an array of sector-specific standards and mandates to achieve emissions reductions throughout the economy.

In 2017, the Climate Leadership Council (CLC) introduced its proposal for a national, economy-wide Carbon Dividends Plan (CDP). The CDP would apply a uniform carbon fee to all US carbon emissions while returning the revenue to American households. It includes a gradually rising carbon price trajectory, a proposed emissions assurance mechanism that would temporarily increase the rate of increase if emission reduction benchmarks are not achieved, and a border carbon adjustment (BCA) system to mitigate the economic impacts of the fee on manufacturing activities that are highly exposed to international competition.

NERA was retained by the CLC to compare the relative projected economic impacts of the CDP proposal to those of a “regulatory” scenario containing the types of non-price regulations typically proposed as alternatives to economy-wide carbon pricing. NERA conducted the analysis using its macro-economic model of the US economy (NewERA) through the year 2036. The regulatory scenario achieved the same total carbon emissions reductions as those projected under the CDP scenario, enabling evaluation of the relative cost-effectiveness of the two approaches.

The CDP scenario’s carbon price starts at $40 per metric ton of CO2 in 2021 and rises 5% annually in real terms. Net carbon revenues are returned to households on a per-capita basis each year. This is accompanied by a BCA that places a tariff on imports based on the carbon-intensity of the manufacturing processes in their country of origin and that rebates carbon fees on US-manufactured products that are exported.

The regulatory scenario applies a clean energy standard (CES) on the electric sector, corporate average fuel economy (CAFE) standards on on-road vehicles, a subsidy program to accelerate the adoption of battery-electric vehicles; energy- and electricity-efficiency standards on industrial production, residential equipment, and commercial buildings; and a moratorium on new leases for fossil fuel extraction on federal lands. 

The analysis found the uniform, economy-wide carbon price guides businesses and households to a more cost-effective set of emission reductions than the sector-specific set of regulatory provisions. The gap in economic costs between the two scenarios is projected to widen over time as both policies achieve deeper emission cuts. The CDP scenario is projected to achieve an additional $190 billion per year in gross domestic product on average over the model horizon with the gap in GDP between the two scenarios widening to $420 billion by 2036. By 2036, the CDP scenario is projected to result in about $1,260 more annual consumption per household than the regulatory scenario. Further, the BCA is found to be an important driver of the higher economic output projected in the CDP scenario. The application of the BCA results in a $119 billion higher output per year under the CDP scenario compared to the regulatory scenario.