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Occasionally binding emission caps and real business cycles

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  • Valentina Bosetti
  • Marco Maffezzoli

Abstract

Recent applications to the modeling of emission permit markets by means of stochastic dynamic general equilibrium models look into the relative merits of different policy mechanisms under uncertainty. The approach taken in these studies is to assume the existence of an emission constraints that is always binding (i.e. the emission cap is always smaller than what actual emissions would be in the absence of climate policy). Although this might seem a reasonable assumption in the longer term, as policies will be increasingly stringent, in the short run there might be instances where this assumption is in sharp contrast with reality. A notable example would be the current status of the European Emission Trading Scheme. This paper explores the implications of adopting a technique that allows occasionally, rather than strictly, binding constraints. With this new setup the paper sets out to investigate the relative merits of different climate policy instruments under different macro-economic shocks. Keywords: Dynamic Stochastic General Equilibrium model, emission trading, carbon tax, occasionally binding constraints. JEL codes: Q58, Q54, E2.

Suggested Citation

  • Valentina Bosetti & Marco Maffezzoli, 2014. "Occasionally binding emission caps and real business cycles," Working Papers 523, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  • Handle: RePEc:igi:igierp:523
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    5. Goulder, Lawrence H. & Hafstead, Marc A.C. & Dworsky, Michael, 2010. "Impacts of alternative emissions allowance allocation methods under a federal cap-and-trade program," Journal of Environmental Economics and Management, Elsevier, vol. 60(3), pages 161-181, November.
    6. Dissou, Yazid & Karnizova, Lilia, 2016. "Emissions cap or emissions tax? A multi-sector business cycle analysis," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 169-188.
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    11. Marco Maffezzoli, 2011. "Tax Evasion under Market Incompleteness," Working Papers 378, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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    Cited by:

    1. Dissou, Yazid & Karnizova, Lilia, 2016. "Emissions cap or emissions tax? A multi-sector business cycle analysis," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 169-188.
    2. Barbara Annicchiarico & Francesca Diluiso, 2017. "International Transmission of the Business Cycle and Environmental Policy," CEIS Research Paper 423, Tor Vergata University, CEIS, revised 19 Dec 2017.
    3. repec:kap:enreec:v:67:y:2017:i:4:d:10.1007_s10640-016-0007-5 is not listed on IDEAS
    4. Barbara Annicchiarico & Luca Correani & Fabio Di Dio, 2016. "Environmental Policy and Endogenous Market Structure," CEIS Research Paper 384, Tor Vergata University, CEIS, revised 22 Jun 2016.

    More about this item

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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