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Optimal carbon pricing with fluctuating energy prices - emission targeting vs. price targeting

Author

Listed:
  • Alkis Blanz

    (University of Potsdam, Mercator Research Institute on Global Commons and Climate Change)

  • Ulrich Eydam

    (University of Potsdam)

  • Maik Heinemann

    (University of Potsdam)

  • Matthias Kalkuhl

    (University of Potsdam, Mercator Research Institute on Global Commons and Climate Change)

Abstract

Prices of primary energy commodities display marked fluctuations over time. Market-based climate policy instruments (e.g., emissions pricing) create incentives to reduce energy consumption by increasing the user cost of fossil energy. This raises the question of whether climate policy should respond to fluctuations in fossil energy prices? We study this question within an environmental dynamic stochastic general equilibrium (E-DSGE) model calibrated on the German economy. Our results indicate that the welfare implications of dynamic emissions pricing crucially depend on how the revenues are used. When revenues are fully absorbed, a reduction in emissions prices stabilizes the economy in response to energy price shocks. However, when revenues are at least partially recycled, a stable emissions price improves overall welfare. This result is robust to different modeling assumptions.

Suggested Citation

  • Alkis Blanz & Ulrich Eydam & Maik Heinemann & Matthias Kalkuhl, 2022. "Optimal carbon pricing with fluctuating energy prices - emission targeting vs. price targeting," CEPA Discussion Papers 51, Center for Economic Policy Analysis.
    • Handle: RePEc:pot:cepadp:51
    DOI: 10.25932/publishup-56104
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    References listed on IDEAS

    as
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    3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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    5. Garth Heutel, 2012. "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 244-264, April.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Optimal carbon pricing with fluctuating energy prices – emission targeting vs. price targeting
      by Christian Zimmermann in NEP-DGE blog on 2022-11-24 16:48:05

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    More about this item

    Keywords

    energy prices; E-DSGE; climate policy; welfare;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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