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Emissions Cap or Emissions Tax? A Multi-sector Business Cycle Analysis

  • Yazid Dissou


    (Department of Economics, University of Ottawa, 120 University St., Ottawa,Ontario)

  • Lilia Karnizova


    (Department of Economics, University of Ottawa, 120 University St., Ottawa,Ontario)

In contrast to previous studies, this paper uses a multi-sector setting to assess aggregate and sectoral impacts of reducing carbon dioxide emissions in the presence of stochastic productivity shocks. We develop a multi-sector dynamic stochastic general equilibrium model, calibrated to the U.S. economy, to compare the economic implications of reducing carbon emissions with an emissions cap and with an emission tax. As in previous studies, we find that an emission cap predicts lower volatility of aggregate variables than an emission tax. Still, our results point to the importance of going beyond a single-sector analysis in evaluating the relative merits of the cap and the tax policies. The ranking of the welfare costs under the two regimes depends on the sources of productivity shocks. While there is no difference in the welfare costs of the two regimes for productivity shocks originating from non-energy sectors, we find that an emissions cap policy is more costly than an emission tax policy for shocks that originate from the energy sectors. Moreover, we find that non-energy shocks have distinct sectoral impacts under the two regimes even though there are no significant differences between the two regimes for the aggregate variables.

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Paper provided by University of Ottawa, Department of Economics in its series Working Papers with number 1210E.

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Length: 57 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:ott:wpaper:1210e
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  1. Beckman, Jayson & Hertel, Thomas, 2009. "Why Previous Estimates of the Cost of Climate Mitigation are Likely Too Low," GTAP Working Papers 2954, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  2. Ellen R. McGrattan & Edward C. Prescott, 2009. "Unmeasured investment and the puzzling U.S. boom in the 1990s," Staff Report 369, Federal Reserve Bank of Minneapolis.
  3. Chris Otrok, 1999. "On Measuring the Welfare Cost of Business Cycles," Virginia Economics Online Papers 318, University of Virginia, Department of Economics.
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  6. Heutel, Garth, 2011. "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks," Working Papers 11-8, University of North Carolina at Greensboro, Department of Economics.
  7. Taylor, John B & Uhlig, Harald, 1990. "Solving Nonlinear Stochastic Growth Models: A Comparison of Alternative Solution Methods," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 1-17, January.
  8. Hafedh Bouakez & Emanuela Cardia & Francisco J. Ruge-Murcia, 2009. "The Transmission Of Monetary Policy In A Multisector Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1243-1266, November.
  9. Gilbert E. Metcalf, 2009. "Market-Based Policy Options to Control U.S. Greenhouse Gas Emissions," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 5-27, Spring.
  10. Gagnon, Joseph E, 1990. "Solving the Stochastic Growth Model by Deterministic Extended Path," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 35-36, January.
  11. Garth Heutel, 2011. "Online Appendix to "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks"," Technical Appendices 10-62, Review of Economic Dynamics.
  12. Young Sik Kim & Kunhong Kim, 2006. "How Important is the Intermediate Input Channel in Explaining Sectoral Employment Comovement over the Business Cycle?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 659-682, October.
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