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GTAP Resource #3926

"Cap or Tax emissions? A Multi-sector DSGE Analysis"
by Dissou, Yazid, Lilia Karnizova and Qian Sun

Even if there is a clear consensus in the scientific community that anthropogenic emissions are harmful and should be reduced, the debate on the policy instruments to curb these is still ongoing in both academic and policy worlds. Carbon tax and cap-and-trade system are the two most appealing policy instruments to curb GHG emissions because of, among several other reasons, their simplicity and relative ease of administrative implementation.
A good understanding of the potential macroeconomic consequences of these two policy instruments in the presence of uncertainty is required for an adequate choice of the right tool. Accounting for uncertainty in the analysis of the potential impact of these instruments is important for two reasons. First, uncertainty, as reflected in the level of output volatility for example, is costly to risk-averse individuals and, hence, should be made explicit in the cost-and-benefit analysis of each policy. Second, under uncertainty price-based and quantity-based policies are not equivalent and yield different welfare losses that hinge on relative curvatures of marginal benefit (of abatement) and marginal cost functions (Weitzman, 1974).
The limited but growing literature concerned with modelling such macroeconomic outcomes in uncertain environments does not reach an agreement on how to rank these two policy instruments. Only a limited number of studies (Angelopoulos et al. 2010; Fischer and Springborn, 2011; Heutel, 2011) assess climate change policies in a dynamic stochastic general equilibrium (DSGE) framework. The latter has now become the standard setting for analysing uncertainty in the macroeconomic literature.
Fischer and Springborn (2011) compare three climate change policies in the DSGE setting. They use levels of macroeconomic variables, volatility and welfare costs of transition as merit criteria to compare tax, cap and trade (CAT), and intensity target. While CAT yields lower volatility than tax, under tax welfare ...

Resource Details (Export Citation) GTAP Keywords
Category: 2012 Conference Paper
Status: Published
By/In: Presented at the 15th Annual Conference on Global Economic Analysis, Geneva, Switzerland
Date: 2012
Created: Dissou, Y. (4/30/2012)
Updated: Dissou, Y. (6/26/2012)
Visits: 2,953
- Climate change policy
- Dynamic modeling
- North America

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