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Climate Policy and the Long-Run Interest Rate: Insights from a Simple Growth Model

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Abstract

We study the impact of climate policy on the long-run real interest rate in a tractable climate-economy model based on the work of Golosov et al. (2014). When the growth rate of the carbon tax exceeds the growth rate of the price of at least one type of fossil energy, the tax reduces the long-run growth rates of consumption and investment, pushing the interest rate up. We find that if fossil energy prices are constant, a carbon tax that grows at 3.5 percent per year decreases the long-run interest by over 50 basis points. This carbon tax growth rate achieves net zero emissions at the lowest possible cost.

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  • Gregory Casey & Stephie Fried & William B. Peterman, 2024. "Climate Policy and the Long-Run Interest Rate: Insights from a Simple Growth Model," Working Paper Series 2024-37, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:99300
    DOI: 10.24148/wp2024-37
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    Keywords

    climate policy; R-star;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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