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Substitutability and the Cost of Climate Mitigation Policy

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  • Yingying Lu
  • David I. Stern

Abstract

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.

Suggested Citation

  • Yingying Lu & David I. Stern, 2014. "Substitutability and the Cost of Climate Mitigation Policy," CAMA Working Papers 2014-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2014-28
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. My Year in Review 2014
      by noreply@blogger.com (David Stern) in Stochastic Trend on 2014-12-30 06:58:00
    2. Wrapping up ARC DP12 Project
      by noreply@blogger.com (David Stern) in Stochastic Trend on 2015-11-15 17:15:00
    3. Should We Stop Investing in Carbon-Free Energy So That We Will Be Able to Afford CCS?
      by noreply@blogger.com (David Stern) in Stochastic Trend on 2016-04-07 04:41:00
    4. Mid-Year Update
      by noreply@blogger.com (David Stern) in Stochastic Trend on 2016-06-01 08:40:00
    5. Annual Review 2016
      by noreply@blogger.com (David Stern) in Stochastic Trend on 2016-12-26 17:08:00

    Citations

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    Cited by:

    1. Ma, Chunbo & Stern, David I., 2016. "Long-run estimates of interfuel and interfactor elasticities," Resource and Energy Economics, Elsevier, vol. 46(C), pages 114-130.
    2. repec:eee:tefoso:v:125:y:2017:i:c:p:258-274 is not listed on IDEAS
    3. Lu, Yingying & Liu, Yu & Zhou, Meifang, 2017. "Rebound effect of improved energy efficiency for different energy types: A general equilibrium analysis for China," Energy Economics, Elsevier, vol. 62(C), pages 248-256.
    4. Paul E. Brockway & Matthew K. Heun & João Santos & John R. Barrett, 2017. "Energy-Extended CES Aggregate Production: Current Aspects of Their Specification and Econometric Estimation," Energies, MDPI, Open Access Journal, vol. 10(2), pages 1-23, February.

    More about this item

    Keywords

    Elasticity of substitution; Mitigation policy; CGE models; G-Cubed; Sensitivity analysis; Decomposition analysis;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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