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Emissions Targets and the Real Business Cycle: Intensity Targets versus Caps or Taxes

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  • Fischer, Carolyn

    (Resources for the Future)

  • Springborn, Michael R.

Abstract

For reducing greenhouse gas emissions, intensity targets are attracting interest as a flexible mechanism that would better allow for economic growth than emissions caps. For the same expected emissions, however, the economic responses to unexpected productivity shocks differ. Using a real business cycle model, we find that a cap dampens the effects of productivity shocks in the economy on all variables except for the shadow value of the emissions constraint. An emissions tax leads to the same expected outcomes as a cap but with greater volatility. Certainty-equivalent intensity targets maintain higher levels of labor, capital, and output than other policies, with lower expected costs and no more volatility than with no policy.

Suggested Citation

  • Fischer, Carolyn & Springborn, Michael R., 2011. "Emissions Targets and the Real Business Cycle: Intensity Targets versus Caps or Taxes," RFF Working Paper Series dp-09-47-rev, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-09-47-rev
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    More about this item

    Keywords

    emissions tax; cap-and-trade; intensity target; business cycle;
    All these keywords.

    JEL classification:

    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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