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Substitutability and the Cost of Climate Mitigation Policy

  • Yingying Lu
  • David I. Stern

We explore how and by how much the values of elasticities of substitution affect estimates of the cost of emissions reduction policies in computable general equilibrium (CGE) models. We use G-Cubed, an intertemporal CGE model, to carry out a sensitivity and factor decomposition analysis. Average abatement cost rises non-linearly as elasticities are reduced. Changes in the substitution elasticities between capital, labor, energy, and materials have a greater impact on mitigation costs than do inter-fuel elasticities of substitution. The former has more effect on business as usual emissions and the latter on average abatement costs. As elasticities are reduced, business as usual emissions and GDP growth also decrease so that there is not much variation in the total costs of reaching a given target across the parameter space. Our results confirm that the cost of climate mitigation policy is at most a few percent of global GDP.

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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2014-28.

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Length: 41 pages
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:een:camaaa:2014-28
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