CBO analyzes how climate change and climate policy affect the US economy and federal budget. It projects that climate change will gradually reduce real GDP growth and lower GDP by 1% in 2050 versus no climate change. It estimates effects on growth from changes in weather patterns and increased hurricane damage. A $25/ton carbon tax, rising 2% annually, would reduce greenhouse gas emissions while raising $66 billion initially, growing to $127 billion in revenues by 2028.

1. Congressional Budget Office
EY Corporate Carbon Forum
November 12, 2020
Phillip L. Swagel
Director
An Overview of CBO’s Work on
Climate Change

2. 1
CBO
How does climate change affect CBO’s forecast of economic output?
How would a tax on greenhouse gases affect emissions and government
revenues?
How would the burden of a tax on carbon dioxide (CO2) emissions be
distributed?
How do climate change and climate change policy interact with the
federal budget?
Questions That CBO Is Addressing About the Economic and Fiscal
Effects of Climate Change and Climate Policy

3. 2
CBO
How Does Climate Change Affect
CBO’s Forecast of Economic Output?

4. 3
CBO
Climate change has many effects on the U.S. economy that are expected to
reduce the growth of gross domestic product (GDP), on net.
Before publishing The 2020 Long-Term Budget Outlook, CBO used a long-term
forecasting approach that accounted for the future effects of climate change on
GDP by carrying forward trends in economic measures that were influenced by
climate change.
Recent research suggests that the effects of climate change on GDP growth will
increase over time, indicating that CBO’s past approach would underestimate
future effects.
Why Project the Effects of Climate Change on GDP Growth?

5. 4
CBO
CBO projects how real (inflation-adjusted) GDP growth would be affected by:
 Projected changes in average weather patterns (temperature and precipitation)
and
 Projected increases in expected hurricane damage.
CBO separately identifies:
 The continuation of recent effects of climate change on economic growth rates
(the amount previously incorporated in the agency’s baseline projections) and
 Projected additional future effects on growth.
CBO projects that because of climate change, real GDP will grow more slowly
each year than it would have under the climate of the late 20th century,
accumulating to a 1.0 percent reduction in the projected level of real GDP in
2050.
What Is Different in The 2020 Long-Term Budget Outlook?

6. 5
CBO
The Studies
 The studies estimate the historical
relationship between temperature and
precipitation and economic output, using
panel econometric methods.
 They use regional data from the United
States.
Overview of CBO’s Approach
 For a given climate change scenario:
– CBO applies each of the econometric
estimates of the relationship between
weather and output to project changes
in economic growth.
– Then CBO runs a meta-analysis to
compute a single estimated growth
effect for that climate scenario.
 Using that array of results, CBO projects
the growth effect associated with the
agency’s central climate change scenario.
CBO Has Drawn on Four Econometric Studies to Estimate the
Effects of Weather Patterns on Real GDP Growth

7. 6
CBO
Source of figure: Congressional Budget Office, using analysis from Solomon Hsiang and others, “Estimating Economic Damage From Climate Change in the United States,” Science,
vol. 356, no. 6345 (June 30, 2017), Figure S17A, pp. 1362–1369, https:/doi.org/10.1126/science.aal4369.
A 2016 report by CBO projected the effects of
climate change on expected hurricane
damage in 2050 on the basis of:
 An insurance industry model of damages
and
 Climate scientists’ projections of sea level
rise and changes in hurricanes’ frequency
and intensity.
CBO has combined the 2050 projection with
an impulse response function from a
computable general equilibrium model, which
translates the direct hurricane damage into
effects on GDP in future years.
CBO Has Drawn on Its Previous Work to Estimate the Effects of
Hurricane Damage on Real GDP Growth
Change in Real GDP per Dollar of Hurricane Damage in Year Zero
Dollars
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0 10 20 30 40 50 60 70
Years Since Hurricane Damage

8. 7
CBO
Source of figure: Evan Herrnstadt and Terry Dinan, CBO’s Projection of the Effect of Climate Change on U.S. Economic Output, Working Paper 2020-06 (Congressional Budget
Office, September 2020), www.cbo.gov/publication/56505.
In CBO’s projections, the average growth
rate of real GDP is 0.03 percentage points
lower from 2020 to 2050 than it would
have been under the climate of the late
20th century.
Of that amount, 0.01 percentage point
was already included in CBO’s earlier
projections, which used the previous
method.
The effect on growth accumulates to the
previously mentioned 1.0 percent
reduction in the level of real GDP in 2050.
CBO’s Projections of the Effects of Changes in Weather and
Increases in Hurricane Damage on Real GDP
How Climate Change Is Expected to Change the Level of Real GDP in 2050
Percentage of Real GDP

9. 8
CBO
CBO’s Estimate of Forgone GDP
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
2020 2025 2030 2035 2040 2045 2050
Percentage of Real GDP

10. 9
CBO
How CBO Used Studies of Weather Patterns and Output in Its
Projection
Data source
Econometric model
Weather-output
relationship
Climate change
scenario
Time horizon
Additional
modeling
assumptions
Projected effect
of changes in
weather patterns
on economic
output

11. 10
CBO
How Would a Tax on Greenhouse
Gases Affect Emissions and
Government Revenues?

12. 11
CBO
See Congressional Budget Office, Options for Reducing the Deficit: 2019 to 2028 (December 2018), www.cbo.gov/publication/54667. GHG = greenhouse gas.
Changes in Revenues and Emissions From a Tax on Greenhouse
Gases That Starts at $25 Per Ton and Rises at a Real Rate of
2 Percent per Year
Projected Values
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Tax on GHG Emissions
(Nominal dollars per
metric ton of carbon
dioxide equivalent) 25 26 27 28 29 31 32 33 35 36
Total Covered Baseline
GHG Emissions
(Millions of metric tons
of carbon dioxide
equivalent) 5,456 5,418 5,373 5,330 5,324 5,336 5,334 5,335 5,332 5,331
Total Covered GHG
Emissions Under the
Option (Millions of
metric tons of carbon
dioxide equivalent) 5,214 5,152 5,073 4,992 4,945 4,919 4,876 4,835 4,791 4,748
Change in Fiscal Year
Revenues (Billions of
nominal dollars) 66a 103 106 108 111 115 119 120 123 127

13. 12
CBO
See Congressional Budget Office, Options for Reducing the Deficit: 2019 to 2028 (December 2018), www.cbo.gov/publication/54667. M MT CO2e = millions of metric tons of carbon
dioxide equivalent.
Reduction in Emissions From a Tax on Greenhouse Gases That
Starts at $25 per Ton and Rises at a Real Rate of 2 Percent per
Year
Emissions
Under the
Option
Baseline
Emissions
0
500
1,000
1,500
2,000
2019 2028
M MT CO2e Electricity
2019 2028
Transportation
2019 2028
Other