Using input–output models to estimate sectoral effects of carbon tax policy: Applications of the NGFS scenarios

Abstract

The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) has engaged in scenario analysis that estimates a $200/ton carbon tax would be required to transition to net zero carbon by 2050. Using a $200/ton carbon tax as a base, this paper uses input–output (IO) modeling to generate price and revenue effects of a carbon tax. Results from these models, which can only be interpreted as the short-run, upper-bound effects of the carbon tax policy, imply that in response to a $200/ton tax on CO₂e emissions, carbon-intensive industries, such as agriculture, extraction, transportation, utilities, and chemicals, may experience price increases in the range of 10-30 percent. Other industries will also experience price increases, but to a lesser degree, due to increased input costs associated with the tax. In addition, modeling results also suggest that industries facing elastic pricing regimes may face similar-sized declines in revenues as a consequence of the carbon tax. Rank-ordered impact results from these models can be utilized by bank supervisors and firms to adequately plan for sectoral-level transition risk within their lending and/or investment portfolios.