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

Yazid Dissou and Lilia Karnizova

No 1210E, Working Papers from University of Ottawa, Department of Economics

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.

Keywords: cap-and-trade; carbon tax; emissions; business cycle; multiple sectors (search for similar items in EconPapers)
JEL-codes: E32 Q43 Q54 Q58 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2012
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Journal Article: Emissions cap or emissions tax? A multi-sector business cycle analysis (2016)
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