We quantify how a carbon tax would affect firms, regional economies, and small banks. We find that the effects are heavily concentrated in a few sectors. Even though we follow emissions down the production chain, industries that generate a large fraction of emissions at the source are still among the most affected. The effects are also highly concentrated in a few regions. The regional effects depend on how much the affected industries dominate the local economy, but the effects are more widespread when low-emitting firms can’t easily substitute away from inputs that rise in price. A carbon tax would also burden community banks operating in counties with a large share of high-emitting industries, but losses at small banks are on average moderate.
This article appeared in the Fourth Quarter 2023 issue of Economic Insights. Download and read the full issue.
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