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Market-based climate policy with fluctuating fossil energy prices

Author

Listed:
  • Blanz, Alkis
  • Eydam, Ulrich
  • Heinemann, Maik
  • Kalkuhl, Matthias

Abstract

Since market-based climate policies such as carbon pricing affect the cost of using fossil resources, rule-based climate policy adjustments in response to fossil energy price shocks may promote macroeconomic stabilization. This raises the question of whether climate policy should adapt to short-term fluctuations in fossil energy prices. We examine this question by employing a dynamic stochastic general equilibrium (DSGE) model calibrated for the German economy. Our results indicate that the macroeconomic and welfare impacts of rule-based carbon pricing adjustments depend on the share of recycled revenue. If revenue is fully absorbed, lowering emissions prices can stabilize the economy in response to rising energy prices. Conversely, if revenue is at least partially recycled, maintaining a stable carbon price will improve overall welfare. With a stable carbon price, revenue recycling acts as insurance against fluctuating energy prices. This result remains robust across several robustness checks.

Suggested Citation

  • Blanz, Alkis & Eydam, Ulrich & Heinemann, Maik & Kalkuhl, Matthias, 2025. "Market-based climate policy with fluctuating fossil energy prices," Economic Modelling, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:ecmode:v:144:y:2025:i:c:s0264999324003390
    DOI: 10.1016/j.econmod.2024.106982
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    More about this item

    Keywords

    Energy prices; DSGE; Climate policy; Welfare;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • 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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