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An analysis of US greenhouse gas cap-and-trade proposals using a forward-looking economic model

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  • GURGEL, ANGELO COSTA
  • PALTSEV, SERGEY
  • REILLY, JOHN
  • METCALF, GILBERT

Abstract

We develop a forward-looking version of the recursive dynamic MIT Emissions Prediction and Policy Analysis (EPPA) model, and apply it to examine the economic implications of proposals in the US Congress to limit greenhouse gas (GHG) emissions. We find that shocks in the consumption path are smoothed out in the forward-looking model and that the lifetime welfare cost of GHG policy is lower than in the recursive model, since the forward-looking model can fully optimize over time. The forward-looking model allows us to explore issues for which it is uniquely well suited, including revenue-recycling and early action crediting. We find capital tax recycling to be more welfare-cost reducing than labor tax recycling because of its long-term effect on economic growth. Also, there are substantial incentives for early action credits; however, when spread over the full horizon of the policy they do not have a substantial effect on lifetime welfare costs.

Suggested Citation

  • Gurgel, Angelo Costa & Paltsev, Sergey & Reilly, John & Metcalf, Gilbert, 2011. "An analysis of US greenhouse gas cap-and-trade proposals using a forward-looking economic model," Environment and Development Economics, Cambridge University Press, vol. 16(02), pages 155-176, April.
  • Handle: RePEc:cup:endeec:v:16:y:2011:i:02:p:155-176_00
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    Cited by:

    1. de Miguel, Carlos & Manzano, Baltasar, 2011. "Gradual green tax reforms," Energy Economics, Elsevier, vol. 33(S1), pages 50-58.
    2. Laurence J. Kotlikoff & Andrey Polbin & Andrey Zubarev, 2016. "Will the Paris Accord Accelerate Climate Change?," NBER Working Papers 22731, National Bureau of Economic Research, Inc.
    3. Reilly, John M., 2012. "Green growth and the efficient use of natural resources," Energy Economics, Elsevier, vol. 34(S1), pages 85-93.

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