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

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  • 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)

Abstract

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.

Suggested Citation

  • Yazid Dissou & Lilia Karnizova, 2012. "Emissions Cap or Emissions Tax? A Multi-sector Business Cycle Analysis," Working Papers 1210E, University of Ottawa, Department of Economics.
  • Handle: RePEc:ott:wpaper:1210e
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    Cited by:

    1. Carolyn Fischer & Garth Heutel, 2013. "Environmental Macroeconomics: Environmental Policy, Business Cycles, and Directed Technical Change," Annual Review of Resource Economics, Annual Reviews, vol. 5(1), pages 197-210, June.
    2. Ramezani, Fariba & Harvie, Charles & Arjomandi, Amir, 2016. "Australian Emissions Reduction Subsidy Policy under Persistent Productivity Shocks," 2016 Conference (60th), February 2-5, 2016, Canberra, Australia 235585, Australian Agricultural and Resource Economics Society.
    3. repec:oup:wbecrv:v:31:y:2017:i:1:p:71-96. is not listed on IDEAS
    4. Hashmat Khan & Christopher R. Knittel & Konstantinos Metaxoglou & Maya M. Papineau, 2015. "Carbon Emissions and Business Cycles," Carleton Economic Papers 15-07, Carleton University, Department of Economics, revised 06 May 2017.
    5. 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.
    6. 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.
    7. repec:eee:appene:v:197:y:2017:i:c:p:270-278 is not listed on IDEAS
    8. Xu, Wenli & Xu, Kun & Lu, Hongyou, 2016. "Environmental Policy and China’s Macroeconomic Dynamics Under Uncertainty---Based on The NK Model with Distortionary Taxation," MPRA Paper 71314, University Library of Munich, Germany.
    9. Valentina Bosetti & Marco Maffezzoli, 2013. "Taxing Carbon under Market Incompleteness," Working Papers 2013.72, Fondazione Eni Enrico Mattei.
    10. Shantayanan Devarajan & Yazid Dissou & Delfin S. Go & Sherman Robinson, 2017. "Budget Rules and Resource Booms and Busts: A Dynamic Stochastic General Equilibrium Analysis," World Bank Economic Review, World Bank Group, vol. 31(1), pages 71-96.
    11. Tatiana Olegovna Tagaeva & Alexander Olegovich Baranov & Vadim Manavirovich Gilmundinov, 2016. "Assessment of the Required Changes of Russian Ecological Taxes," International Journal of Energy Economics and Policy, Econjournals, vol. 6(3), pages 611-616.
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    14. Devarajan, Shantayanan & Dissou, Yazid & Go, Delfin S. & Robinson, Sherman, 2014. "Budget rules and resource booms : a dynamic stochastic general equilibrium analysis," Policy Research Working Paper Series 6984, The World Bank.
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    More about this item

    Keywords

    cap-and-trade; carbon tax; emissions; business cycle; multiple sectors;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • 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

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