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Optimal Emission Prices Over the Business Cycles

Jussi Lintunen () and Lauri Vilmi ()
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Jussi Lintunen: Natural Resources Institute Finland (Luke)
Lauri Vilmi: Bank of Finland

Environmental & Resource Economics, 2021, vol. 80, issue 1, No 5, 135-167

Abstract: Abstract We prove that under the most typical circumstances optimal emission prices are procyclical, i.e., prices should be lower during recessions. The procyclicality is more likely when emissions propagate very slowly into environmental damage. A prime example of such process is $$\hbox {CO}_2$$ CO 2 emissions. We show that carbon prices should be closely linked to the fluctuations of the marginal utility of consumption, which implies relatively modest magnitude of carbon price fluctuations. Our findings imply that climate policies should focus on setting the carbon price to the optimal growth path level and give carbon price fluctuations only a secondary role. Opposite to the carbon price, the cyclicality of optimal emissions depends on the production technology in the energy sector, and may become countercyclical in future if the technology mix becomes less fossil dependent.

Keywords: Pigouvian emission price; Social cost of carbon; Cyclical properties; DSGE; Emission tax; Cap and trade (search for similar items in EconPapers)
JEL-codes: E32 Q54 Q58 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10640-021-00581-x

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