The Fiscal Costs of Climate Change in the United States

Abstract

This paper explores the fiscal impacts of climate change and their policy implications for the United States. I develop and empirically quantify a climate-macroeconomic model where climate change can affect both public expenditures (e.g., on Medicare) and tax revenues. First, the paper presents a novel quantification of fiscal impacts based on an empirical analysis of public healthcare costs associated with extreme temperatures and a literature synthesis. Second, I show theoretically that the social cost of carbon (SCC) must account for climate impacts on both government consumption and household transfers if the marginal cost of public funds exceeds unity. Finally, the numerical results indicate that fiscal impacts are first order for climate policy design: (i) Public expenditure impacts increase the SCC by 23-33%; (ii) climate change is estimated to cost U.S. taxpayers $88 billion per year by 2026 already, and (iii) fiscal considerations increase the projected domestic U.S. welfare benefits of optimized carbon and energy pricing by up to a factor of three.