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Emissions Cap or Emissions Tax?

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  • Dissou, Yazid
  • Karnizova, Lilia

Abstract

This paper compares a cap and a tax as instruments in controlling a reduction of greenhouse gas emissions using a multi-sector dynamic stochastic general equilibrium (DSGE) model. The model incorporates two types of fossils and takes into account stochastic variations in sectoral productivity shocks. We …nd that a cap dampens the volatility in the aggregate variables, relative to a tax. However, the tax policy is preferred from the welfare perspective when shocks to the production of fossils are taken into account. These shocks signi…cantly a¤ect the production of not only fossils, but also the other economic sectors. We further …nd that a cap constraint increases the sensitivity of fossils sectors to ‡uctuations in all types of productivity shocks.

Suggested Citation

  • Dissou, Yazid & Karnizova, Lilia, 2012. "Emissions Cap or Emissions Tax?," Conference papers 332189, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332189
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    References listed on IDEAS

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