The Impact of CO2 Emission Cuts on Income

We study how carbon dioxide (CO2) emission cuts affect income for 23 OECD countries over the 1980-2004 period. The importance of this question is manifested in the disagreements at the 2009 United Nations Climate Change Conference in Copenhagen and the 2010 State of the Union Address by United States President Barack Obama. We start by deriving an income-CO2 relationship based on a structural production function, which is a natural way to model the relationship among income, energy consumption, and CO2 emissions. We then use a similar empirical methodology as Tucker (1995) to estimate the income-CO2 relationship. Such an approach not only allows us to focus on the long-run relationship but also enables us to project the relationship between income and CO2 emissions for future years. Our findings suggest that the economic cost of CO2 emission cuts is significant. To reduce emissions 50% below 1990 levels by 2050, the economic cost per year for developed countries is about 0.3% reduction in GDP per capita which represents a 15% slowdown in economic growth