A policy and quantitative analysis of U.S. climate policy from a global perspective

Abstract

We analyze a recent significant shift in United States (US) climate policy focusing on a landmark law: the Inflation Reduction Act (IRA). To put the IRA in context, we adopt a three-pronged approach. First, we describe the portfolio of economic policies available to address climate change, highlighting their advantages and disadvantages in an intuitive manner. Second, we reflect on US climate policies prior to the IRA and compare them to those of other major players, such as the European Union and China. Third, we offer a quantitative estimation of the IRA's impact on the US economy. We compare the IRA's green subsidies with the effects of a potential carbon pricing policy that achieves the same reduction in CO₂ emissions. Our Computable General Equilibrium simulations account for various channels affecting the efficiency of climate policies, indicating that carbon pricing would be a more efficient approach. There are good reasons why both the EU and China and have opted for this mechanism. We highlight the challenges faced by the US and other countries, including those stemming from political feasibility, which hinder quicker advances in the green transition.