Advanced Search
MyIDEAS: Login to save this paper or follow this series

How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks

Contents:

Author Info

  • Heutel, Garth

    ()
    (University of North Carolina at Greensboro, Department of Economics)

Abstract

How should environmental policy respond to economic fluctuations caused by persistent productivity shocks? This paper answers that question using a dynamic stochastic general equilibrium real business cycle model that includes a pollution externality. I first estimate the relationship between the cyclical components of carbon dioxide emissions and US GDP and find it to be inelastic. Using this result to calibrate the model, I find that optimal policy allows carbon emissions to be procyclical: increasing during expansions and decreasing during recessions. However, optimal policy dampens the procyclicality of emissions compared to the unregulated case. A price effect from costlier abatement during booms outweighs an income effect of greater demand for clean air. I also model a decentralized economy, where government chooses an emissions tax or quantity restriction and firms and consumers respond. The optimal emissions tax rate and the optimal emissions quota are both procyclical: during recessions, the tax rate and the emissions quota both decrease.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://bae.uncg.edu/assets/research/econwp/2011/11-08.pdf
File Function: Full text
Download Restriction: no

Bibliographic Info

Paper provided by University of North Carolina at Greensboro, Department of Economics in its series Working Papers with number 11-8.

as in new window
Length: 58 pages
Date of creation: 08 Mar 2011
Date of revision:
Handle: RePEc:ris:uncgec:2011_008

Contact details of provider:
Postal: Box 26165, Greensboro, NC 27402-6165
Phone: (336) 334-5463
Fax: (336) 334-4089
Web page: http://www.uncg.edu/bae/econ/
More information through EDIRC

Related research

Keywords: Climate change; Environmental policy;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Fischer, Carolyn & Springborn, Michael R., 2011. "Emissions Targets and the Real Business Cycle: Intensity Targets versus Caps or Taxes," Discussion Papers, Resources For the Future dp-09-47-rev, Resources For the Future.
  2. Jordi Galí, 2004. "On The Role of Technology Shocks as a Source of Business Cycles: Some New Evidence," Journal of the European Economic Association, MIT Press, MIT Press, vol. 2(2-3), pages 372-380, 04/05.
  3. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 768, Board of Governors of the Federal Reserve System (U.S.).
  4. Jinill Kim & Sunghyun Henry Kim, 2007. "Two pitfalls of linearization methods," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2007-64, Board of Governors of the Federal Reserve System (U.S.).
  5. Robert N. Stavins, 2008. "A Meaningful U.S. Cap-and-Trade System to Address Climate Change," Working Papers, Fondazione Eni Enrico Mattei 2008.82, Fondazione Eni Enrico Mattei.
  6. Gilbert E. Metcalf & Aparna Mathur & Kevin A. Hassett, 2011. "Distributional Impacts in a Comprehensive Climate Policy Package," NBER Chapters, National Bureau of Economic Research, Inc, in: The Design and Implementation of U.S. Climate Policy, pages 21-34 National Bureau of Economic Research, Inc.
  7. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 195-232.
  8. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, Elsevier, vol. 17(3), pages 247-252.
  9. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  10. Nicholas Stern, 2008. "The Economics of Climate Change," American Economic Review, American Economic Association, American Economic Association, vol. 98(2), pages 1-37, May.
  11. Galí, Jordi, 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1499, C.E.P.R. Discussion Papers.
  12. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
  13. Carlson, Curtis & Burtraw, Dallas & Cropper, Maureen & Palmer, Karen L., 1998. "Sulfur dioxide control by electric utilities : what are the gains from trade?," Policy Research Working Paper Series, The World Bank 1966, The World Bank.
  14. Bushnell, James & Chen, Yihsu, 2009. "Regulation, Allocation and Leakage in Cap-And-Trade Markets for CO2," Staff General Research Papers, Iowa State University, Department of Economics 13131, Iowa State University, Department of Economics.
  15. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 45(3), pages 703-724, September.
  16. Harrison Fell & Ian A. MacKenzie & William A. Pizer, 2012. "Prices versus Quantities versus Bankable Quantities," NBER Working Papers 17878, National Bureau of Economic Research, Inc.
  17. Kenneth Y. Chay & Michael Greenstone, 1999. "The Impact of Air Pollution on Infant Mortality: Evidence from Geographic Variation in Pollution Shocks Induced by a Recession," NBER Working Papers 7442, National Bureau of Economic Research, Inc.
  18. Newell, Richard G. & Pizer, William A., 2006. "Indexed Regulation," Discussion Papers, Resources For the Future dp-06-32, Resources For the Future.
  19. Fujii, Tomoki & Karp, Larry, 2008. "Numerical analysis of non-constant pure rate of time preference: A model of climate policy," Journal of Environmental Economics and Management, Elsevier, vol. 56(1), pages 83-101, July.
  20. Nordhaus, William D, 1991. "To Slow or Not to Slow: The Economics of the Greenhouse Effect," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 101(407), pages 920-37, July.
  21. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 45(3), pages 686-702, September.
  22. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, American Economic Association, vol. 99(3), pages 1053-69, June.
  23. Nathan S. Balke & Stephen P.A. Brown & Mine K. Yücel, 2010. "Oil price shocks and U.S. economic activity: an international perspective," Working Papers, Federal Reserve Bank of Dallas 1003, Federal Reserve Bank of Dallas.
  24. Carolyn Fischer & Alan K. Fox, 2007. "Output-Based Allocation of Emissions Permits for Mitigating Tax and Trade Interactions," Land Economics, University of Wisconsin Press, University of Wisconsin Press, vol. 83(4), pages 575-599.
  25. Falk Ita & Mendelsohn Robert, 1993. "The Economics of Controlling Stock Pollutants: An Efficient Strategy for Greenhouse Gases," Journal of Environmental Economics and Management, Elsevier, vol. 25(1), pages 76-88, July.
  26. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, Elsevier, vol. 85(3), pages 409-434, September.
  27. Dixon,Huw David & Rankin,Neil, 1995. "The New Macroeconomics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521479479.
  28. Pizer, William, 2005. "The Case for Intensity Targets," Discussion Papers, Resources For the Future dp-05-02, Resources For the Future.
  29. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  30. Kevin D. Hoover & Katarina Juselius & Søren Johansen, 2007. "Allowing the Data to Speak Freely: The Macroeconometrics of the Cointegrated Vector Autoregression," Discussion Papers, University of Copenhagen. Department of Economics 07-35, University of Copenhagen. Department of Economics.
  31. Sherry Bartz & David L. Kelly, 2006. "Economic Growth and the Environment: Theory and Facts," Working Papers, University of Miami, Department of Economics 0601, University of Miami, Department of Economics.
  32. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  33. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 45(3), pages 507-532, June.
  34. Oates, Wallace E & Portney, Paul R & McGartland, Albert M, 1989. "The Net Benefits of Incentive-Based Regulation: A Case Study of Environmental Standard Setting," American Economic Review, American Economic Association, American Economic Association, vol. 79(5), pages 1233-42, December.
  35. Gilbert E. Metcalf, 2009. "Market-Based Policy Options to Control U.S. Greenhouse Gas Emissions," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 23(2), pages 5-27, Spring.
  36. Don Fullerton & Garth Heutel, 2007. "The General Equilibrium Incidence of Environmental Mandates," NBER Working Papers 13645, National Bureau of Economic Research, Inc.
  37. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  38. Kelly, David L., 2005. "Price and quantity regulation in general equilibrium," Journal of Economic Theory, Elsevier, Elsevier, vol. 125(1), pages 36-60, November.
  39. Gary Anderson, 2008. "Solving Linear Rational Expectations Models: A Horse Race," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 31(2), pages 95-113, March.
  40. John Reilly & Kenneth Richards, 1993. "Climate change damage and the trace gas index issue," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 3(1), pages 41-61, February.
  41. Hoel, Michael & Karp, Larry, 2002. "Taxes versus quotas for a stock pollutant," Resource and Energy Economics, Elsevier, Elsevier, vol. 24(4), pages 367-384, November.
  42. Yongsung Chang & Sun-Bin Kim, 2007. "Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 97(5), pages 1939-1956, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ris:uncgec:2011_008. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Garth Heutel).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.